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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. How 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. Example 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:
Example of an ordinary W2 worker's taxes that has a small business that incurred a loss it's first year:
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. The Business 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 expenses now. 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 write-offs. 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 through. 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 below:
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 income. Below is a list of ordinary expenses that could be included as a business write-off:
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. |
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