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Give Yourself A Tax Break

 

 

This is the time of year when I have to chuckle when people get excited they are getting their tax refund.  

 

It's like a gift from heaven our benevolent federal government sends you a refund, just at the right time when you need it!

 

Few people realize if they are getting a refund they were paying too much in taxes all year long.

 

Our brilliant lawmakers have saddled the American public with a tax code that is over 55,000 pages in which even the most astute tax professionals can't agree how to interpret.

 

Over the years Congress has picked winners and losers using the tax code to reward cronies and punish enemies.  It doesn't take those in a tin foil hat to realize the IRS can be weaponized - and is on a regular basis.

 

When you have a small business that is not incorporated, you file a Schedule C with your income taxes that details the profit and loss from your business.  If you operated at a loss, it is a direct reduction of your taxable income.  A family making $50,000 per year in taxable income after all other itemized deductions is in the 15% tax bracket. A $5,000 loss in a business on a Schedule C would reduce taxes by $750. ($5,000 x 15%)

 

Of course, I am not advocating spending $5,000 to save $750 in taxes.  The simple truth is a legitimate home-based business operating as a d/b/a (sole proprietorship) has many items that can translate as an expense that gets added to your Schedule C, such as the pro-rated square footage calculations for your mortgage, utilities, insurance, etc. for the portion of your home you use an an office, shop, etc.  In other words, many of these expenses that you are already paying now become partially deductible.

 

Let me be clear, you don't setup a business just to avoid taxes.  You must have a profit motive. Experts disagree on the length of time the IRS will look to business that loses money every year.  As long as you are putting in effort, keeping meticulous records and attempting to make a profit, your motive is apparent.  

 

As someone who has filed at least one Schedule C (and some years multiple) on my personal income taxes for thirty plus straight years, I can tell you that owning a small business, especially a home-based business, is one of the last methods  you have to reduce the taxes on your personal income.

 

I am not offering tax advice here, nor am I offering to teach you how to illegally shelter income to avoid taxes.  The simple truth is that having a home-based business is something every household should entertain, not just for the tax benefits but as a hedge against nasty surprises such as layoffs or unexpected financial emergencies.

 

Nothing replaces expert advice in this area, but don't feel like you need to hire an expensive CPA just to get a business started.  Keep your business records and accounts separate from your personal accounts and records and get help with doing your taxes.  For many years I did our personal taxes without a CPA, using one of the online software applications. 

 

It's not always necessary to start a home-based business as an LLC or Corporation.  In some cases, you lose the tax benefits of the Schedule C for instance if you incorporate (unless you choose Sub-Chapter S).  Get expert advice in this area if you are not sure.

 

Lastly, don't be afraid of the big bad wolf (the IRS)!  Many people never start a business because somehow they think a home-based business will trigger an audit.  The kryptonite for any IRS audit (and I've had over a dozen) is meticulously kept records!

 

And don't forget to make sure your elected officials know how ridiculous it is for us to have our productivity taxed!  It's un-American!  Our Founders wouldn't have stood for it!  Heck - they started a Revolution over the Stamp Act!  

 

For more solid business principles, read the book Unemployable! by David Thomas Roberts.  Available for 40% off using promo code: RENEGADE on the Defiance Press and Publishing website.

 

The Renegade Capitalist is offering up to a $25,000 investment to the best business plan submitted the website. Check there for details. 

 

 

 

 

 

 

 

 

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