First I had to agree to pay a fee of $5,000 a year
(group A) or $33/month (group B) in exchange for their advice on how I could
save taxes by setting up a home based business. In both cases, they promised
they could show me how to save an extra $5,000/year in taxes -- even though
they didn't know anything about me or how much taxes I am paying. With the
first group, that meant I would only break even -- unless they could show me
how to save even more in taxes. With the second group, the annual cost of
$396 would be a "bargain" if they could really show me how to save an extra
$5,000 a year in taxes.
These promoters didn't bother to discover that I've had
a home based business since 1981 and I've been a tax accountant since about
1960. My first newsletter was called "Tax Tricks & Techniques for the Self
Employed." Frankly, I think this kind of deal is a scam so I'm going to "blow
the whistle" and tell you how to get some tax breaks as a home based business
-- and it won't cost you $396 or $5,000 a year. It's free, with my
compliments.
By the way. The IRS also believes this kind of deal is
a scam and they have issued an announcement that they will challenge such
arrangements. See
http://www.irs.gov/pub/irs-news/ir-02-13.pdf
Tax Breaks for Home Businesses
First, let's look at the tax issues for anyone who has
a business at home. Here are a few of the tax breaks that I've found that are
available to the home based business. This is not intended to be an
exhaustive list nor are these items in any particular order. And, please
note that this article is a very brief and non-technical summary of some tax
rules that are very complicated. And, there are substantial restrictions on
some of these deductions.
1. A deduction for home office expenses for an area
used only for business. This includes depreciation plus a portion of the
utilities, property taxes, insurance and home loan interest. But this
deduction is only available if you have a profit from your home business in
excess of the home office deduction.
2. A deduction for auto depreciation or a mileage deduction for a car used
for business.
3. A deduction for 100% (2003) of your medical insurance costs. Other
medical costs will be subject to the exclusion for 7.5% of adjusted
gross income.
4. A deduction for various business expenses that must be itemized if
incurred by an employee.
5. A deduction for any phone lines in excess of the first one -- if used for
business.
6. A deduction for any computer equipment, fax machine, etc. -- if used 100%
for business.
7. A deduction for any wages paid to a child for work that is actually
performed. The child can then put some or all of that money into a Roth IRA
that will be tax free many years from now.
8. A larger retirement plan deduction than the IRA deduction for an
employee.
9. A medical reimbursement plan and other benefits for a spouse who is a
bone fide employee.
10. Some educational expenses are fully deductible for the proprietor - but
with limits.
11. Expenses for attending many kinds of seminars and conferences would be
deductible.
12. A home based business is not limited by the "
hobby loss " rules that only allow you to deduct losses in two out of any
five consecutive years -- so long as it is a bone fide business.
In addition, the home based business can deduct any
expenses that are ordinary and necessary cost of producing and selling a
product or service -- the same as any business.
These deductions are for a business owner who is
organized as a proprietorship rather than as a corporation.
If a home based business is making a profit in excess
of what is required for living expenses, a taxable corporation can help to
reduce the total tax burden substantially. Up to $50,000 of corporate profits
each year are taxed at a maximum federal tax rate of 15% -- with no self
employment taxes on that retained profit. The corporation can establish a
medical expense reimbursement plan to deduct 100% of any medical costs for
the family. The corporation can buy term life insurance on the employees on a
tax favored basis and can provide for other employee benefits such as tax
free child care costs and retirement savings.
However, if you do operate your home business as a
corporation, you will have to give up the home office deduction. So you need
to consider the benefits of one versus the other.
If you happen to be a tax accountant or tax lawyer who
is familiar with these rules, please don't bother to tell me what I left out
of these very brief descriptions. If you aren't a tax accountant, don't rush
out to use these ideas without getting qualified help to learn about the
details.
Now, if you are tempted by the offers of an opportunity
to save taxes by starting a home based business, don't feel that you have to
pay up to $5,000 a year and to sell the service to your friends and family in
order to get the tax breaks for a home business. I've just described the main
tax breaks for a home based business so you can focus on finding a business
opportunity that is more to your liking or talents than trying to sell an
overpriced tax advice system as a business "opportunity".
What Kind of Businesses Can You Operate From Home?
Nearly any kind of marketing based venture where you
are trying to sell some product will qualify as a home based business if you
operate from your home. While I personally have an aversion to Multi-Level
Marketing plans, there are a lot of people who do make a very nice income
from such ventures. If you have any expertise in any subject, you can offer
consulting services about that subject or you can attempt to sell your
know-how through a newsletter. Perhaps you have some skill with a particular
software program. You could offer advice for a fee over the phone or you
could do contract work for a company that needs some temporary help. You
could also work as a free lance writer or an editor for companies that have
large web sites. You could create an email publication or a web site and then
sell advertising to help pay for the time and cost of providing that
information. If you are moderately skilled at maintaining a web site, there
are a host of "affiliate" marketing deals available through the Internet.
Basically, you promote someone else's product from your web site and they pay
you a commission for anyone that comes from your web site to theirs and makes
a purchase. You could set up a web site to sell books through Amazon.com or
other large book dealers, wholesalers or publishers.
Being able to deduct some of your home expenses for a
business office in your home is a mixed blessing. As long as you own the
home, it provides some extra tax savings without having to incur added cash
expenses. Actually, a home office is usually much less costly than an
office outside the home, so you are also saving money by having an office
at home. The other side of the issue is that when you sell the home, part
of your sales proceeds will be subject to depreciation recapture and taxed
at a rate of 25% -- whereas the gain on the non-business part of your home
may be completely tax free up to $250,000 per spouse. Another "catch" is
that you must have some profit from your home based business in order to
claim this deduction.
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