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18

A List of Tax Benefits of Starting a Home Business & Getting Ahead in Life

I have always believed that starting a home business is the best tax planning strategy and because the biggest expense in our lifetime is the income taxes we pay, thus the best way to get ahead in life.

If you are an entrepreneur operating from your home, don’t be shy to claim the rightful tax deductions you are entitled to.  While this article is specific to the United States tax code, most income taxing jurisdictions follow the same general theme, favoring businesses over individuals from a taxing perspective.

If you are a blogger, internet marketer or an online business owner of any sort and work out of your home for at least part of the year, consider taking advantage of the tax benefits for starting a home business.

This article is also inspired by a woman’s story I read in a magazine yesterday while getting my hair cut.  In the story, the woman opted to start a home based babysitting business so she could raise her daughter and not have to send her to a day care.

Here are some of the ways how starting a home business led to significant tax advantages for her family:

Home Office Deduction

Most business owners, part time or full time are afraid of taking this deduction because they fear being audited by the IRS.  That is rubbish. Make sure you take this deduction if you are starting a home business.

First of all, merely claiming a home office deduction is not a red flag in itself. Second, even if it was, what do you have to be afraid of? I have been audited by the IRS multiple times.  I have never had to pay additional taxes, fees or penalties. In fact, I ended up getting more money back on two occasions, plus an apology for wasting my valuable time.

When you are operating a home business, you are entitled to deduct a portion of your rent or mortgage payment, as well as other bills that pertain to operating your home such as security systems, phone bills, cable TV, yard maintenance, property taxes, etc.

Medical Expense Deductions

When you have a home based business, you can take advantage of medical expense deductions through a reimbursement plan adopted by your business.

Most medical expenses such as cosmetic treatments, braces and LASIK surgery fall under the “non reimbursable medical expense” category. Not if you operate a home business however.

With a medical expense reimbursement plan, you can employ your spouse and their children (therefore your children) and cover expenses like braces, LASIK and routine purchases at the local CVS or Wallgreens pharmacy.

You can read more about taking advantage of the medical expense deduction that is available to you when starting a home business.

Vehicle Deduction

Usage of your personal vehicle for your home business related tasks is also fully deductible under the tax code.  When you use your vehicle for business, such as picking up and dropping off people or stuff, or making business related purchases, meeting clients for lunches, you qualify for the vehicle deduction when filing your taxes.

You can either claim the deduction by stating the miles drive attributed to business  use, or actual expenses incurred as part of doing business.  The prior is the easier method which most people opt for, but make sure you optimize your vehicle deduction as much as possible by analyzing actual costs.  Many people leave far too much money on the table by opting for the easier route.

Meals, Entertainment & Travel

Meals, entertainment and travel expenses incurred in the name of business are also deductible.  Starting a home business doesn’t mean you are always at home.  For example, if you took a family trip (say a vacation) somewhere exotic and decided to spend a few hours conducting business, you can officially deduct a part or all of your trip’s expenses as a business expense.

Meals and entertainment expenses picked up while in transit during business hours, or wining and dining clients are also deductible.  Make sure to keep all your receipts. Better yet, use one credit card for all business related expenses.

Retirement Plans

A typical W2 employee can usually stash retirement cash away in a 401k plan and an IRA (Individual  Retirement Account).  The limit for each as of the time of this post is $16,000+ and $5,000 per year.

As a home business owner, you are entitled to a more aggressive deferred tax plan such as the SEP plan.  As of the time of this post, you are allowed to pump up to $46,000 into that account.  Oh yeah!

Other Cost Savings of Starting a Home Business

One of the most interesting benefits of operating a home based business in my opinion are the ancillary savings that result from you simply operating from home as opposed to driving to an office space to work.

For example, if you have children, you may be able to save on day care expenses, which is the largest expense after rent for many families. In some cases, it is just as much if not more than the rent they pay!  You save on gasoline bills.  You depreciate your car less. If your route involves toll charges and parking at work, you get to avoid all those, and then some.

You don’t have dry cleaning bills because you no longer have to wear that freshly cleaned and steam ironed shirt to work.  You avoid spending 200% more on lunches because you have to dine out. Can you think of more collateral benefits of simply working from home?

Concluding Thoughts on Starting a Home Business

I understand that these benefits pertain specifically to those who primarily own their own business.  However, thes advantages of a starting a home business apply to those working full time and running a side business (read why you should!) at the same time as well. That said, all of the above are just a handful of benefits of operating your own business. There is a lot more to it that is well worth looking into.

Although the example in this article is specific to babysitting, it really applies to any home business.  For example, this can apply to tutoring, data entry, transcribing, bookkeeping, blogging, Internet marketing and all sorts of other home based businesses.

This post also further reinforces why owning a side business is the best tax planning strategy, and yet one which a majority of Americans either don’t know about, understand or don’t act upon (some just don’t want to for various reasons).

Readers: Are you taking legal advantage of the tax code? Or are you giving away more than half your income away to uncle Sam?  How do you file your taxes?  Do you hire a CPA? As entrepreneurs who work from home, do you feel you need more guidance or assistance in ensuring that you are maximizing your tax benefits and legally paying the least amount in income taxes?

5

Another Incentive of a Home Based Business, Deducting Medical Expenses

One of the bonuses you get entitlement to as a home based business owner is non reimbursable medical expense deductions through a medical expense reimbursement account for your spouse and children.

Deducting medical expenses is usually not permissible, unless the expenses exceed a certain amount of a tax filers adjustable gross income. This threshold usually precludes most medical tax deductible items and doesn’t allow for deductible medical expenses on one’s tax return.

A friend of mine is a trader and works from home.  His wife helps him with accounting and paperwork while he travels, handles client relationships and executes the import and export trades.

They were over the other day and his wife was discussing how expensive braces have become.  They have a daughter who is getting ready to get braces to straighten her teeth.  My friend (the Dad) soon added that he intends to get LASIK surgery done in the near future. This prompted the discussion of the potentially deducting medical expenses under IRS Publication 502.

If you own a home based business, you are entitled to establishing a medical expense reimbursement account that you can offer to your spouse and their children (therefore yours too) if you were to employ your spouse in your business.

Under this circumstance, deducting medical expenses can significantly help the business owner’s family, especially for a family like my friend who will be paying for braces, LASIK and all kinds of other over the counter medical stuff.

As discussed earlier, the Internal Revenue Service (IRS) allows an income tax deduction for someone who itemizes on their 1040 – income tax returns. However, there are thresholds to meet (medical expenses have to be a percentage of AGI – adjusted gross income) before one can claim this medical expense deduction.  Expenses that cannot be deducted are labeled as non-deductible medical expenses.

But not for home based business owners! Under IRS Section 105, a home based business owner is permitted to hire their spouse and pay them just in benefits. Yes, no salary is required and you can pay through a medical expense reimbursement plan adopted by your home based business.  The beauty of this is that your spouse’s children, therefore yours, are also qualified to receive the tax write offs.

IRS Publication 502 provides a lengthy list of tax deductible items that are qualified under a medical expense reimbursement plan.  Here is a snapshot of that list.

What Medical Expenses are allowed as an Income Tax Deduction?

• Abortion
• Acupuncture
• Alcoholism
• Ambulance
• Annual Physical Examination
• Artificial Limb
• Artificial Teeth
• Autoette
• Bandages
• Birth Control Pills
• Body Scan
• Braille Books and Magazines
• Breast Pumps and Supplies
• Breast Reconstruction Surgery
• Capital Expenses
• Car
• Chiropractor
• Christian Science Practitioner
• Contact Lenses
• Crutches
• Dental Treatment
• Diagnostic Devices
• Disabled Dependent Care Expenses
• Drug Addiction
• Drugs
• Eyeglasses
• Eye Surgery
• Fertility Enhancement
• Founder’s Fee
• Guide Dog or Other Service Animal
• Health Institute
• Health Maintenance Organization (HMO)
• Hearing Aids
• Home Care
• Home Improvements
• Hospital Services
• Insurance Premiums
• Intellectually and Developmentally Disabled, Special Home for
• Laboratory Fees
• Lactation Expenses
• Lead-Based Paint Removal
• Learning Disability
• Legal Fees
• Lifetime Care—Advance Payments
• Lodging
• Long-Term Care
• Meals
• Medical Conferences
• Medical Information Plan
• Medicines
• Nursing Home
• Nursing Services
• Operations
• Optometrist
• Organ Donors
• Osteopath
• Oxygen
• Physical Examination
• Pregnancy Test Kit
• Prosthesis
• Psychiatric Care
• Psychoanalysis
• Psychologist
• Special Education
• Sterilization
• Stop-Smoking Programs
• Surgery
• Telephone
• Television
• Therapy
• Transplants
• Transportation
• Trips
• Tuition
• Vasectomy
• Vision Correction Surgery
• Weight-Loss Program
• Wheelchair
• Wig
• X-ray

I don’t even know what some of these mean, and this is just one component of the publication. Visit the IRS’s website to access the rest here.

I have always believed and preached that establishing and owning your own side business is the best tax planning strategy, and since income taxes are your biggest lifetime expense, the best way to get ahead in life.

Deducting medical expenses is yet another big benefit of owning a side business and further reinforces that belief.

Readers: Did you know this option was available for you if you owned your own business?  Now that you do, do you plan on taking advantage of it now or later? Why or why not?

15

Optimize Your Vehicle Deduction if You Own a Business & Get Money Back from Uncle Sam

The vehicle deduction is one of the many tax deductions available to business owners, whether you own a business full time or just on the side.

If you have claimed the vehicle deduction before, chances are you have claimed it in terms of mileage driven for business purposes.   Most business owners opt for this route.

Before taking the vehicle deduction on your tax returns next time, consider the actual vehicle expenses you incurred and compare it to the mileage deduction.

Uncle Sam allows us to opt for the deduction in two ways, by either claiming the miles we drove for business, or the actual vehicle expenses we incurred that can be attributed to the business.

If you drive a 4 cylinder Honda Civic, you are likely better off going the mileage deduction route.  But what if you drive a 6 cylinder truck or a luxury SUV?  Does it cost the same amount to run a larger, more expensive vehicle than a small four cylinder four wheeler?

As far as the Internal Revenue Service (IRS) is concerned, it doesn’t matter to them which route you go, so long as you can prove it if audited.  As far as the tax payer goes (you), often times the tendency is to take the quicker path to completing the tax return.

Think about it, will your CPA / Accountant really spend the time and effort to ensure you get the most money back? It means more time wasted for them that leads to less clients they can service and therefore less in fees generated.

Here are just some of the cost components to consider when contemplating the motor vehicle deduction:

  • Cost of fuel
  • Parking Charges
  • Insurance Premiums
  • Maintenance and Repair
  • Toll Charges

Notice the vehicle tax deduction is not part of this list. That is a separate deduction all together available on the sales tax you pay when you purchase a brand new vehicle.

The insurance on a luxury vehicle costs more than a standard vehicle.  The fuel costs on a larger gas guzzler will cost more than a Honda civic. Maintenance such as oil changes and flat tires will definitely cost more for a luxury vehicle, especially if it is also large.

Will your Accountant care? Likely not. So don’t assume that taking the mileage deduction is the best vehicle deduction you can take, not if you drive a Cadillac Escalade no.  Analyze your actual expenses and see if the actual expense deduction method makes more sense for you.

Just make sure you keep a good track record of expenses and mileage drive. The IRS requires you to log these expenses near the time of incurring them.  You don’t need to fear an IRS Audit as long as your records are tight.

Readers: Which route do you take when claiming the vehicle deduction? Why? Has anything changed after reading this post? Read what the IRS has to say about taking the vehicle deduction.

Sunil
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