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Based Business: Your Ultimate Tax Shelter
Home Based Business: Your Ultimate Tax Shelter
by J. Stephen Pope
Starting and operating your own home
based business is the ultimate tax shelter.
Although this article has been written from a Canadian income tax
perceptive, the
principles should be practical in other tax jurisdictions.
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1. Non-Deductible Personal Living Expenses
All of us have expenses that we incur in everyday living. Either
you rent an apartment or house or you own your residence. Utilities,
insurance, rent, mortgage
interest, property taxes,maintenance and repairs are typical costs
of operating
your home. Likely, you have a vehicle which also consumes large amounts
of
cash. Add to this, dining out, entertainment, gifts, office supplies,
telephone
and many other expenditures, and you have a significant cash outflow.
In most
cases, as an employee, retired person, investor, student, or homemaker,
few
of these expenses are tax-deductible to you. This means that you
must earn a
considerable income, pay your income taxes first, and then use what
is left to
pay all your expenses. Some employees may be able to write-off some
of their employment related expenses, if such are required by their
contract of employment. However, even in this situation, the tax
deductions are very limited.
2. Your Own Home Based Business Means Tax Deductions
Now consider the situation where you decide to start your own home
based
business. Suddenly, many of your everyday expenses are now being
used for
business purposes and are now tax-deductible. If you use one quarter
of your
home exclusively for business use, you will be able to deduct (or
write-off) one
quarter of related occupancy costs. These expenses may include maintenance
and repairs (that are not capital in nature), rent, mortgage interest,
house or
apartment insurance, power, heat, water, and property taxes.
As well, your vehicle expenses used
for business purposes are another tax writeoff. If you use your car
ninety percent for business purposes, you can deduct
ninety percent of your vehicle insurance, gas and oil, maintenance
and repairs,
car washes, license and registration, auto club, loan interest (within
certain
limits), and other costs from your income. You may also write-off
one hundred
percent of your business related parking. Capital Cost Allownance
(C.C.A.) on
your vehicle is also allowed for income tax purposes; depreciation
is the accounting term for this tax deduction. The Canadian government
also allows as a deduction, fifty percent of your business related
entertainment expenses. Also tax-deductible are business related
telephone expenses, Internet access, office supplies, travel, books,memberships,
and a host of other expenditures.
3. Income Splitting with Your Home Based Business
If you have a high paying job, you will pay higher taxes because
the rates of tax
increase as your income does. With your own business, you can pay
reasonable
wages to your spouse and children. In this way, you can legally divert
income
taxed at your higher rate to your family members that are in a lower
tax bracket.
This tax saving technique is called income splitting. It is another
good reason
why your own home based business is the ultimate tax shelter.
4. Even a Part-Time Home Based Business Works
Even if you have a full-time job, running a part-time business can
be advantageous. Of course, you must actually run a real, moneymaking
business. Any
attempts to write unprofitable hobbies off will ultimately fail with
the taxation
authorities. If you earned eight thousand dollars during the year
from your parttime business and were able to deduct eight thousand
dollars in car expenses,
home office expenses, entertainment costs, office supplies, and other
business
related expenditures, you would have a net business income of nil.
You would
pay no tax on this additional income.
Don't miss this important point!
Although these tax deductions are actual,
legitimate business expenses, these are expenditures you would probably
have
made anyway, whether you had a business or not. Thus, by rearranging
your
affairs to start and operate a home based business, you have been
able to
convert non-deductible personal expenditures into legally deductible
business
expenses. You have successfully sheltered your income from tax and
have split
your income with family members in lower tax brackets.
Yes, indeed, your home based business has become your ultimate tax
shelter.
About The Author: J. Stephen Pope, President of Pope Consulting
Inc.,
http://www.popeconsultinginc.com/ has been helping clients to earn
maximum
business profits for over twenty years.
For valuable Work at Home Small Business Ideas, visit:
http://www.yenommarketinginc.com/
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