Most people that have
regular jobs working for companies get paid on a W2. At the end
of the year, most workers get a statement saying how much you earned,
and how much in taxes were taken out. Then this information is recorded
on your tax statements and then you figure out if you owe the government
more money, or if they owe you.
One of the parts to the tax statements
that everyone fills out is the line "Business income or (loss)."
This is where those that have businesses record either an income
from there business, which increases their taxable income, or a
loss for their business, which reduces their taxable income.
The goal in tax planning is to reduce
your taxable income to the lease amount possible because the lower
your taxable income is, the less taxes you pay, since it's based
on a percentage of your taxable income.
write-offs help business owners
The government supports the launching
of new business because it is new businesses that drive the economy
and make money. And the more money people make, the more taxes they
pay, which increases the government's income. Therefore, there are
many tax deductions, or write-offs, that business owners can take
advantage of that ordinary workers cannot. These deductions will
be outlined in more detail in a later section.
Write-offs help business owners
because, as stated earlier, they can reduce the amount of taxable
income that they record to the IRS, which lowers their taxes. For
example, a business owner who goes golfing with a potential client
can write-off that golf expense as a business expense because it
is for business purposes, an ordinary W2 worker who goes golfing
with a co-worker cannot take that deduction.
of a write-off
The following is an example that
illustrates how a basic write-off works:
Example of an ordinary W2 worker's
|Taxes owed at a 27% tax rate
|Income kept by worker
Example of an ordinary W2 worker's
taxes that has a small business that incurred a loss it's first
|New taxable income
|Taxes owed at a 27% tax rate
|Income kept by business
In this example, the
business owner saved $7,300 in taxes because he
reported a $10,000 loss on his business. And that's the power of
write-offs; they keep money that you would normally pay to the IRS
in taxes in your pocket.
Now you may ask, How can someone
just report a loss of $10,00 on a business? Well, it's easier than
you may think. There are hundreds of ordinary expenses that most
people have that could be termed a business expense. These will
be listed below in a later section.
How to take advantage of write-offs
The first thing that you must do
to take advantage of write-offs is to set up a business. Now what
if you don't have a business idea? That doesn't matter, you just
need to have a business name registered with your local state, and
the business name does not have to relate to the business at all.
Legalities software that's part of the Business Kit
sold here gives you the information on how to choose a business
name and also how to choose a business structure. Upon registering
your business, you will want to get a Federal ID number. This will
be used when reporting taxes so that the government can see that
you've got a business registered. Once you've got your business
set up, you can start taking advantage of write-offs.
You may still have the question
in mind, Well, what type of business should you run? Well, you should
probably focus your business on something that you know about or
something that interests you.
For example, say you like fly fishing,
you could start a fly fishing training business where you would
take people fly fishing, give them some tips, and then charge then
a minimal amount for it. This way you could write-off all your fly
fishing supplies as well as many other expenses.
Another example could include starting
an Internet business selling crafts that you've made. Or you could
invest in real estate and look for foreclosure homes to buy, fix
up, and then sell. There are thousands of business ideas that you
could pursue, but the key is to get started now. You will want to
take advantage of the money you can save by writing off business
Once you've got your business set
up, then you will want to keep track of all the expenses that you
incur for your business, as well as research and find additional
expenses that you can write-off. These additional expenses could
be just normal living expenses that can be deducted as business
A main step in saving money with
a new business is to learn what tax deductions are available to
you. You can learn about these by contacting the IRS by calling
1-800-tax-form or online at www.irs.gov.
There are two tax guides that can assist you: #334 and #530, these
are the home/small business tax guides that you'll want to look
A good way to keep track of business
expenses is to use a basic spreadsheet program that can automatically
add up your expenses for you. We offer programs for both traditional
business and Internet businesses in our Accounting
Software section of the Business Kit. These programs
are easy to use and very inexpensive and provide a good way to keep
track of expenses.
You will also want to keep all your
receipts of your business expenses as well. It's not a bad idea
to have a log book that you store and record them in so at tax time
you can find them easily. Next we will go over some of the business
expenses that you could be writing off.
General business expense write-offs
Most people understand that marketing
expenses would be considered a business expense, so we won't go
into much detail on that here. But the thing to understand is that
these expenses will reduce your taxable income, so the more there
are, the lower the taxes you will pay. The key difference in in
the ordinary living expense write-offs that are discussed below.
Some of the general business expenses that you would incur are listed
- Marketing expenses
- Office supplies and equipment
Ordinary living expense write-offs
There are many other expenses that
you would normally incur in your daily living that can be included
as business expenses. This is where the main tax advantages of having
your own business will come in handy because these are expenses
that you are already incurring, but now they can reduce your taxable
Below is a list of ordinary expenses
that could be included as a business write-off:
- Travel - if you take a trip to
visit family, and during that trip, set up a business meeting
with a potential client, the travel expenses to get you to your
destination can be written-off. Travel can be deducted as a complete
expense like in the purchase of an airline ticket, or can be deducted
by the amount of miles that you drive. The mileage rate is currently
about $.36 a mile, so every 100 miles you drive can be deducted
as $36 of business expenses.
- Meals - I have a business partnership
with my wife and we often go to dinner and talk about the business,
so we include many of these meals as write-offs.
- Cell phone bill - A cell phone
seems to be a necessity among business owners, which could be
completely written off as a business expense as well.
- Internet service provider - Most
business research can be done online, so the $20 to $50 a month
that you are paying for your Internet connection can be a business
- Office supplies & equipment
- A computer is an essential business expense that can be either
written off or depreciated. Other office supplies like paper,
pens, a new desk, and many other can be included here.
- Other home office expenses -
If your primary area for running your business is out of your
home, and the room that you work in is 20% of the size of your
home, you can deduct 20% of many of your home expenses like rent,
mortgage, phone, utilities, etc.
- Vehicle deductions - If you use
your car for business purposes you can depreciate it's value and
take that as an expense. This can also be done on the value of
- Business supplies & equipment
- For the fly fisherman, a new fishing pole or new lures can be
As you can see, there are many expenses
that you are normally incurring that can be moved over to business
write-offs. It doesn't take too much digging to come up with thousands
of dollars in expenses that can save you real money in taxes.
The Hobby-loss rule
The government has cracked down
on people that form businesses around their hobbies just to report
a deduction each year on their taxes. They have done this by forming
the Hobby-loss rule. What this means is that if you have a business,
you must report an income in 3 out of 5 years. So for the first
2 years you can have a $20,000 loss each year, and then make a small
income the next 3 years, and then you'll be fine.
This rule can be argued and businesses
can report additional losses for more than 2 years, but for the
most part, make sure to report an income for every 3 out of 5 years
that you are running your business.