did you know - small & home based businesses

Has anyone ever told you that you can get a lot of valuable tax breaks when you are self employed or if you have a small home-based business?

Probably. But did any of those well-meaning people tell you what those valuable tax breaks are? Or how to qualify for them? Or what records you need to keep?

Probably not.

Well, if you don't know…
  • What they Are,
  • How to Qualify, or
  • What Records to Keep,
…what value is their advice? None!

Or maybe they tried to "help" and told you things like:
  • 'You can write-off all of your car expenses if you put a magnetic sign on it' (which is wrong, by the way), or
  • 'The minute you sign-up you can start writing off lots of personal expenses' (which also is not quite true).
Giving you bad information is worse than telling you nothing. Will Rogers once said, "It ain't what people know that's dangerous, it's what they think they 'know' that just ain't so."

Maybe your friend gave you the correct information about a tax deduction or two, but "forgot" to mention that there are certain steps you must take in order to qualify for them. Have you ever heard the saying, "He/she knows enough about a topic to be dangerous, but not enough to be useful?"

Does that mean you should 'Play it Safe' When claiming Business Deductions?


Let's think about this… If you can't afford to get a speeding ticket, but you don't know what the speed limit is, what do you do? Duh! Drive slower, of course -- "just to play it safe."

Is that the way you handle your tax deductions too? If you aren't sure "what the speed limit is," you back-off on your deductions -- "just to play it safe" -- right?

But you don't do that when you are sure of the tax law. For example, if you have three kids, do you claim only two of them "just to play it safe?"

Of course not!

Why not? Because you know the law lets you deduct all of your kids, and because you know how to count to three.

What would it mean to you, if you were as certain about tax laws that provide deductions for your small business, as you are about claiming deductions for your dependents? You'd save a boatload in taxes, that's what it would mean!
Understand, we're NOT talking about using "tax dodges" or "loopholes" or "gray areas" or "tax evasion schemes."

We are talking about tax laws passed by the United States Congress specifically to encourage taxpayers like you and me to actively operate a small or home-based business - even on a part-time basis - with the intent to make a profit.

Why does Congress Want to Encourage Home-Based Businesses?


First, the fastest-growing business category -- for several years in a row -- has been Small Businesses. Encouraging continued growth in that segment simply makes sense for our national economy.

Second, unemployment puts a huge drain on the economy, and the leading job-growth category, again, is Small Business. Job growth = lower unemployment = strong economy.

Third, if every taxpayer had a part-time home-based business as a "safety net" or "back-up plan," a mass-layoff by a large employer would have less of a damaging impact on the economy.

Say what?


If thousands of people suddenly were to be laid-off from their jobs without notice (does the name Enron ring a bell?), the first steps most would take would be to quickly polish-up their resumes, check the Help-Wanted ads, and head to the Unemployment Office – not necessarily in that order.

BUT NOT YOU. If you have a part-time home-based business, your first action could be to ramp-up your part-time business into a full-time business. Unlike many of the others who were also laid-off, you could almost-immediately replace a large portion of your lost wages, with an ongoing source of steadily increasing income.

That's why Congress passed HUGE tax breaks to encourage the start-up and ongoing operation of small businesses.

Former United States Supreme Court
Chief Justice Louis Brandies said:

"When I leave the Supreme Court Building in Washington, DC to return to my family in Virginia, I usually cross a toll-bridge. But when I'm not in a hurry, I drive a mile out of my way to use a 'free' bridge, which serves the useful social function of alleviating congestion on the toll bridge.

"If I were to cross the toll-bridge without paying the tax to the toll collector, that would be "Tax Evasion," for which I should be punished. But if I drive out of my way to use the free bridge, that's "Tax Avoidance," for which I should be commended.

"The sad thing is that most people don't even know the free bridge exists."

You are about to get a map to a lot of "free bridges," i.e., small-business tax deductions that are 100% IRS -compliant, easy to qualify for, and simple to document.

Most taxpayers (and most professional tax preparers) are clueless about these small-business-friendly tax breaks, for a variety of reasons…

  • The media gave very little publicity to these laws when they were passed,
  • Small-business tax law is not taught in most accounting schools,
  • Knowledge of small-business tax law is not even tested on CPA exams,
  • IRS 'clarifications' focus on what you cannot deduct, not on what you CAN.

Here's how your business can Qualify …


In order to be "IRS-compliant," you must:
  1. Be able to Prove & Demonstrate that you Intend to make a Profit.
    2.
    • Have a written Business Plan.
    • Determine when you expect your business to become profitable.
    • Continually be improving and expanding your business.
  2. Work your business on a Regular and Consistent basis
    3.
    • Regular and consistent activity more important than the number of hours.
    • As little as 45 minutes, 4-to-5 days a week satisfies the Tax Court.
    • Notes in your day planner will help document your business activities.
  3. Maintain Accurate Records
    4.
    • Record All Business Income.
      Deposit all business income into a Business-only checking account
      Keep a running log showing, for each check received:
           Date received
           Amount received
           Source of income (company name, etc.)
           Purpose of income received (i.e., Products Sold, Commissions,Bonuses, etc.)
    • Record All Business Expenses.
      Use a business-only checking account for all business expenses.
      The purpose is to keep from co-mingling personal money with business funds.

      Use one or more credit cards exclusively for business expenses.
      Keep from co-mingling personal and business charges
      Interest and fees on business-only cards are Tax Deductible.
    • Record Your Business Activity too.
      A Daily Diary is acceptable documentation (IF it is accurate and complete)
      Show regular and consistent activity (vs. irregular, inconsistent activity)

Now that you know the Three Steps to Qualifying, What Exactly Can You Deduct?


Very few expenses are "always deductible." In most cases deductibility depends on why you incurred an expense, how you intend to use the product or service purchased, whether a purchase was exclusively for business use or partially for business use, etc.

Here are examples of some of the major categories of business deductions…

VEHICLE USE: Your vehicle can net you a deduction worth 50½¢ per mile (2008) or more when used for business. That's a deduction of more than $5,000 if you drive your car 10,000 miles for business purposes. Deductions can be even higher if you alternate the use of two vehicles. There's even a legal way to convert non-deductible commuting, into a tax deductible business expense! (See next section.)

VACATIONS: With the proper combination of knowledge and planning, your non-deductible "vacations" could be converted into tax-deductible "business trips." Many people save thousands every year this way. This deduction is worth somewhere around $2,000 to $3,000 a year for almost anyone who takes annual vacations. It's 100% legal, but you have to follow some easy rules. (See next section.)

CURRENT EXPENSES: If you use a portion of your home exclusively and regularly for business purposes, then a percentage of your rent (yes, finally renters get a tax break), utilities, homeowners or renters insurance, general maintenance and upkeep, cleaning services, and other "indirect expenses" that you are already paying for in after-tax dollars, could be converted into tax-deductible business expenses. This deduction has proven to be worth around $4,000 to $5,000 for many people. But there are some restrictions to be aware of. (See next section.)

HEALTH CARE COSTS: If you employ your spouse part-time in your home-based business, and provide him or her with a formal, legally structured "Employee Benefit" called a "Self-Insured Health Cost Reimbursement Plan," you could deduct, as a business expense, every dollar spent on any kind of health care that is not reimbursed under any insurance policy – for your entire family (which includes YOU). This deduction is worth an average of $3,500 for the typical family of four. There are three important steps to setting this up legally. (See next section.)

COMPUTERS, PHONES, ETC.: Equipment which you purchase specifically for use in your small or home-based business, can now be fully depreciated in the year of purchase (this is a HUGE new benefit!). This applies to computers, fax machines, printers, routers, scanners, digital cameras, cellular phones), office furniture and most other business equipment. In 2007, this "Section 179 Election" could be worth up to $125,000 in a single year! (See next section.)

MEALS & ENTERTAINMENT: You probably already know that, when you "pick up the tab" for Dining with or Entertaining your clients, customers, prospects or anyone else who c ould contribute to the success of your business, you can deduct 50% of the cost. But did you know that, under circumstances which you can control, you could also include your spouse and kids, and deduct their expenses also! Do you know how to deduct the cost of your own meal without picking up the tab for the person you talked business with? These are all 100% legal deductions, IF you know and follow some simple rules. (See next section.)

EVEN THE 'ALLOWANCE' YOU PAY YOUR KIDS! Federal Tax Court has ruled that a child as young as 7-years-old can perform meaningful services as an employee of his/her parent(s) in a home-based business. The wages you pay your children are tax deductible for you as a business expense, and the income to the minor is tax-free (up to $5,000 per child, per year). This deduction can be worth up to $15,000 to a family with three dependent children. The rules are very specific, but easy to follow. (See next section.)

What Should You Do NEXT?


You've just been introduced to nearly $40,000 in additional tax deductions you could qualify for if you operate a legitimate business with a profit-intent.

But you've read several times now that, to qualify, "you must follow some simple rules." Where do you find out what those simple rules are? Come and see me or give me a call. I would be happy to discuss how these areas can benefit you. Of course let me do next years tax return. Remember, when all is said and done... it's not how much you make that counts but how much you keep that matters! And that's the bottom line.

Sincerely,

Douglas A. Sevy