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.
1. Non-Deductible Personal Living Expenses
All of us have expenses that we incur in everyday living. Either you rent an apart-
ment 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 employ- ment. 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 write-
off. 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 account-
ing term for this tax deduction. The Canadian government also allows as a deduc-
tion, 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 advant-
ageous. 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 part-
time 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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