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Your Best Tax Strategy - Start a Side-Business

Save money on your taxes with a home business!

I'm busy enough! I don't have time to start a business!

What good would it do me anyway?

Well, having your own business is one of the best ways to save money on taxes. Considering that at tax time, many of you pay your government all your wages from January to May, you might be interested in this topic. (Please note that this advice is based on the US tax code. If you live elsewhere, your mileage may vary.)

Consider this example.

If you work for someone else (as in a JOB), your finances flow somewhat like this:
1. Earn the money
2. Pay Taxes
3. Spend the money

When you have your own business or corporation, you:
1. Earn the money
2. Spend the money
3. Pay Taxes on what's left

Do you see the difference here? I'm going to recommend a book for you to read if you want to understand this process better. It is called "Rich Dad Poor Dad" by Robert Kiyosaki. It is a great book and I highly recommend it. Now, back to our article.

When starting a business, The IRS requires only that you keep good records, conduct your affairs in a business-like manner and show that you are trying to make a profit. There are also some new tax laws that favor "home offices" even more than in previous years. A TurboTax software program can further assist you in finding deductions to maximize your returns.

Old Tax Law: If your home office is your principal place of business, then you could deduct home office expenses.

New Tax Law: If you have a space at home that you use "regularly and exclusively for administrative or management activities" in your business, you may now qualify for a home office deduction.

Previously, if you worked outside of your home, you weren't allowed to deduct your home office because it isn't the "primary" place of business. Now you can. For more information, see the Internal Revenue Service publication #587 on the IRS Web site,

There are a lot of deductions associated with home offices. Some things that might be deductible include a percentage of your mortgage interest, property taxes, rent, utilities, insurance, garbage collection, second phone line, cleaning fees, magazines/newspapers, office supplies and equipment.

If your home is the principal place of business, you are allowed to deduct the mileage for all your business trips. You can count the mileage from your home to the place of business (i.e. post office, bank, client site) and the return trip. The IRS requires that you keep good records of your driving. Keeping a little pocket calendar in your car or handbag is an easy way to track mileage on a daily basis. At 32.5-cents a mile, every 307 miles of driving will earn you a $100 deduction. This can add up very quickly over the course of a year. I know it does for me.

If you have children under 18, hire them to work in your business. You must issue them a W-2 and all the money you pay them is a business deduction for you. Your child must pay taxes on the money they earn but there is no tax on the first $4,300 of income earned from working. Your child can even deposit up to $2,000 into an IRA account for even bigger savings. There's also no Social Security tax to pay when you hire your child under 18. Please remember that your child must do real work and you must keep good records. I know people who send their children to private schools on tax-free income. They pay their child to work in their business and the child uses that income to pay tuition.

Are you starting to see some of the possibilities here?

Any purchases you make in association with your business are deductible. If your business is enjoyable and related to your interests, you might have made some of these purchases anyway and now they are deductible.

If you are going to have a business for tax reasons, your intent should be to make a profit. The IRS knows that there are significant costs in starting a business and that it might not be profitable for a few years. A general rule is to show a profit within two to four years. [Editor's note: My understanding is that the IRS requires you to show a profit at least three years in five. Otherwise, they actually hit you retroactively for back taxes, and that can HURT. With a little effort, i.e., putting back or deferring some legitimate deductions, you ought to be able to show a profit from the first year. I *strongly* recommend working with a skilled tax professional specializing in small business. When I started doing this, I found out that I could take a per-diem food allowance on business trips that was a far larger deductible item than my actual cost. That alone saved me $1200 in reported income and paid for the cost of the tax preparer.]

The longer you go without making a profit, the more likely the IRS might consider your business a hobby and disallow the deductions you are claiming unless you can show a business plan with a definite plan to be profitable and show changes when needed to increase your chances for profitability.

So once again, consider a side-business. It could save you hundreds of tax dollars every year.

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By Doris Dobkins, Money Saving Expert
Author of "Financial Freedom A-Z Home Study Course"
and publisher of the free weekly ezine $mart Money New$
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