Tax Advantages of a Home-Based Business.
If You Don't Have a Home-Based Business, Start One Today!
- Sandy
Botkin, CPA.
Esq.
This
may be a decade of tremendous corporate profits and economic growth, but
for the vast majority of North Americans, the 90's have been a dismal,
uphill climb. And many economists believe that this next, new millennium
won't be getting better any time soon.
Why?
Changing
business and government attitudes are the reason. There has seemingly been
more anti-business legislation in the last decade than in any other this
century. Stronger employment and labor laws, the Age Discrimination in
Employment Act, the Comprehensive Omnibus Budget Reconciliation Act
(COBRA, which includes mandating health insurance for workers for a period
of time after they leave employment), safety laws, much tougher laws for
discharging workers, more liabilities for lawsuits, Family Leave Act,
Americans with Disabilities Act (which is creating immense numbers of
lawsuits), along with higher minimum wages and fringe benefits.
Just
reading this list is exhausting.
While
these acts have beneficial and protective aspects, they have also
encouraged businesses to move their facilities. That "sucking
sound" popularized by Ross Perot is not just down to
The
young and the middle-aged alike are realizing that their dream of
"having a job with a company forever" is an illusion. Companies
have been downsizing, rightsizing, and capsizing for some time now, and
they continue to do so - more now than ever before. Even the federal and
state governments are getting into the act with layoffs and attrition of
jobs.
In
addition to all this uncertainty and mutual lack of loyalty between
companies and employees, even the workers who do not keep their jobs have
no guarantee of promotions due to the shrinking number of management
positions. These circumstances aggravate the already tryingly long
commutes in rush hour traffic and increasingly typical frustrated
boss-spelled backwards, that double S-O-B.
Finally,
if all this isn't bad enough, under recent tax laws employees are shafted
more than ever wit h limits and thresholds for their employee deductions
and higher social security tax limits. This results in more couples
working than ever before and, on many occasions, working more than one
job. It is now almost impossible to have only one job in the family and
make ends meet! Today, many households need three incomes just to survive.
Sadly,
even having more than one job does not produce any major positive effect
on most people's bank accounts. Why? Because of tax laws. This was well
illustrated in 1994 by Jane Bryant Quinn in her Woman's Day article on
"How to Live on One Salary."
Where
The Money Goes
Ms.
Quinn's example assumed that a man was earning $40,000 per year. His wife
(we will call her Lori) wasn't working. They had more month than money.
(Sound familiar?) Lori subsequently got an administrative job for $15,000
per year. You would think this would improve the family's financial
situation, but when Ms. Quinn examined the economics of getting this extra
income, the results were startling!
Lori
had to pay federal and state taxes on her new income. Since they filed
jointly, the family's combined income was what established their tax
bracket. She paid $4,500 in new taxes, most of which was non-deductible,
for federal and state income tax.
Lori
had social security withheld from her paycheck at the rate of 7.65
percent, which amounted to an additional nondeductible amount of $1,148
being extracted from her salary. She also had to commute to work 10 miles
a day round trip, which is probably conservative for most people. This
resulted (in 1995) in nondeductible commuting costs of $696.
Lori
also had some child care expenses, which give a partial tax credit. Ms.
Quinn figured that the amount spent over and beyond the tax credit was
$4,250 per year.
Lori
also ate out each day with colleagues, spending an average of $5 per day,
five days a week. This results in a nondeductible expense of $1,250 per
year. ( I would love to know where she ate fore only $5!)
Now
that Lori has a job, she has to have professional clothing, this means a
hefty dry cleaning bill. Ms. Quinn assumed that Lori's increased expenses
here amounted to an extra $1,000 per year, nondeductible, of course.
Finally,
with both spouses working, Lori wasn't in the mood to cook dinner every
night. They bought more convenience foods and ate out more frequently.
This resulted in increased food costs of a nondeductible $1,000 per year
in minimum.
Add
it all up and Lori's take home pay was a paltry $1,156 a year, for which
she had to put up with a daily commute, an unpleasant boss, and corporate
hassles. (See the following summary of all of these numbers, so you can do
the math for yourself.)
No
wonder more and more people are starting home-based businesses. In fact,
there are currently an estimated 30 million people working from their
homes. This number is expected to more than triple, to 97 million, by the
year 2000, and to keep on growing. This has become and will continue to be
one of the greatest mass movements in the
Why
a Home-Based Business Makes So Much "Cents"
There
are many reasons why so many people are favoring home-based over
traditional business.
There
is no commute (unless you have a really big home), no boss, little if any
chance of lawsuits, must lower overhead, no employees, (or few), and far
fewer government restrictions. In fact, many of the laws previously cited
don't apply to small firms with few or no employees. It is for these
reasons, according to Entrepreneur magazine, that 95 percent of home-based
businesses succeed in their first year and achieve an average income of
$50,250 per year with many earning much more.
There
are really two sets of tax laws in this country. One is for employees, and
it allows deductions for individual retirement accounts, 401(k)s (if you
have one set up by your company), interest and property taxes on your home
(which some in Congress want to do away with ), and charity. Then there
are the laws for home-based business people who conduct their business
either full-time or part-time. They can deduct, with proper documentation
,their house, their spouse, and even children (by hiring them), their
business vacations, their cars, and their food with colleagues. They can
also set up a pension plan that makes any government plan seem paltry by
comparison.
For
Lori - and for you - the meaning of all this is simple:
Lori
earned $15,000 in salary as an employee, but took home only $1,156. She
could have netted the entire $15,000 had she earned it in a home-based
business!
This
is an increase of almost 13 times her take-home pay as an employee.
Notice
that Lori is not spending dramatically more money than she is currently
spending. She would eat out anyway, go on trips and drive her car the same
as before. By having a home-based business, however, many of their
expenses become deductible. This concept is known as "redirecting
expenses." With a home-based business, she can now deduct some of the
expenses that she is incurring anyway.
Renegade
Strategy: If you don't have a home-based business, start one!
In
addition to all the benefits mentioned above, Congress will subsidize you
while you are growing your home-based business. If your home-based
business produces a tax loss in the first year or so, you can use that tax
loss against any other income you have. It can be used against wages
earned as an employee, dividends, pensions, or interest income-or you can
use the loss against your spouse's earnings if you file a joint return.
If
the tax loss exceeds all your income for this year, no problem. You can
carry back the loss two years and get a refund from the IRS for up to the
last two years of income taxes paid, or you can carry over the loss twenty
years. You read it right: You can offset up to 20 years of income!
Here's
an example:
Mike
earns $50,000 in a job with the government. If he starts a home-based
business that generates a tax loss of 10,000, he only pays tax on $40,000.
Renegade
Tip: You can never lose a properly documented business deduction.
In
fact, if everyone in the
Renegade
Strategy: Get LUCK - Labor Under Correct Knowledge.
Can
You Succeed In a Home-Based Business?
Research
has constantly shown that it rarely the business that determines success
or failure. It is usually the business owner. Why does one person succeed
and another fail at the same business?
Two
words - Knowledge and Action.
Some
people want the benefits of having their own business, but they don't take
action. The result is business failure.
Then
there are the people who are always working. The take action but still
fail. The reason is that they are not taking the correct actions, the
knowledgeable actions, that will bring the desired results. Again,
business failure.
It's
like drilling for oil. If you set up a drilling rig in your back yard, it
is going to fail at producing oil unless your back yard is in
The
point is that most people who get excited about starting their own
home-based business do so without all the necessary knowledge.
Consequently, many people quit before they acquire, through experience,
the knowledge they need, without realizing that they are getting
substantial tax breaks. This leads to another strategy....
Renegade
Strategy: Learn to duplicate the success of others.
Duplicating
the strategy of others is much quicker and more effective than going to
the school of hard knocks.
It
is also known as modeling, which is well-illustrated by the way The
McDonalds Corporation blazed a trail to success that many have since
followed.
In
the early 1950's McDonald's and other start-up companies discovered that
they could grow many times faster than the conventional firms through
franchising. Instead of the company investing millions of dollars to build
new stores, they let independent franchise do it for them.
It
seemed like a great idea, but at first no one figured out how to make it
succeed on a consistent basis; therefore, the media attacked relentlessly
and continually. News articles featured destitute families who had lost
their life savings through franchising schemes. Virtually every state
attorney general in the
Over
the years, however, Ray Kroc and his management team at McDonald's
developed a turnkey franchise business team at McDonald's franchise. The
newfound success-from the system-turned public perception of franchising
around. Today, virtually every franchise business models-to some
extent-the franchise business system created by McDonald's, making
franchising one of the most respected ways of doing business in the world.
Modeling
is simply learning what other successful people have done to achieve
success in a specific area, and then doing the same thing. Someone said
that "education is the shortcut to experience." With modeling,
you literally leverage your own learning with the collective years of
learning through experience of many others. Modeling the success of others
saves both time and money and reduces frustration and stress.
The
light at the end of the tunnel, for you and millions of others today, is
the financial opportunity that starting your own business offers. If you
have one going already, then make sure you are enjoying the many financial
advantages to which your smart choice entitles you. The tax advantage
alone can make a home-based business the single best financial move you
could ever make.
E-mail us at info@taxreductioninstitute.com
Call us at (800) TRI-0-TAX (800-874-0829)
or (301) 972-3600
Fax us at (301) 972-0819
Mail us at Tax Reduction Institute
13200 Executive Park Terrace
Germantown, Maryland 20874
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