Your Best Tax Strategy - Start a Side-Business

I'm busy enough! I don't have time to start a business!

What good would it do me anyway?

Well, having your own business is one of the best ways to save money on
taxes and considering that many of you just finished paying Uncle Sam
all your wages from January to May 2000, I thought you might be
interested in this topic.

Consider this example.

If you work for someone else (as in a JOB), your finances flow somewhat
like this:
1. Earn the money
2. Pay Taxes
3. Spend the money

When you have your own business or corporation, you:
1. Earn the money
2. Spend the money
3. Pay Taxes on what's left

Do you see the difference here? I'm going to recommend a book for you
to read if you want to understand this process better. It is called
"Rich Dad Poor Dad" by Robert Kiyosaki. It is a great book and I highly
recommend it. Now, back to our article.

When starting a business, The IRS requires only that you keep good
records, conduct your affairs in a business-like manner and show that
you are trying to make a profit. There are also some new tax laws that
are even more in favor of those "home offices" than in previous years.

Old Tax Law: If your home office is your principal place of
business, then you could deduct home office expenses.

New Tax Law: If you have a space at home that you use "regularly
and exclusively for administrative or management activities" in your
business, you may now qualify for a home office deduction.

Previously, if you worked outside of your home, you weren't allowed to
deduct your home office because it isn't the "primary" place of
business. Now you can. For more information, see the Internal Revenue
Service publication #587 on the IRS Web site, http://www.irs.treas.gov

There are a lot of deductions associated with home offices. Some
things that might be deductible include a percentage of your mortgage
interest, property taxes, rent, utilities, insurance, garbage
collection, second phone line, cleaning fees, magazines/newspapers,
office supplies and equipment.

If your home is the principal place of business, you are allowed to
deduct the mileage for all your business trips. You can count the
mileage from your home to the place of business (i.e. post office,
bank, client site) and the return trip. The IRS requires that you keep
good records of your driving. Keeping a little pocket calendar in your
car or handbag is an easy way to track mileage on a daily basis. At
32.5-cents a mile, every 307 miles of driving will earn you a $100
deduction. This can add up very quickly over the course of a year. I
know it does for me.

If you have children under 18, hire them to work in your business. You
must issue them a W-2 and all the money you pay them is a business
deduction for you. Your child must pay taxes on the money they earn but
there is no tax on the first $4,300 of income earned from working. Your
child can even deposit up to $2,000 into an IRA account for even bigger
savings. There's also no Social Security tax to pay when you hire your
child under 18. Please remember that your child must do real work and
you must keep good records. I know people who send their children to
private schools on tax-free income. They pay their child to work in
their business and the child uses that income to pay tuition.

Are you starting to see some of the possibilities here?

Any purchases you make in association with your business are
deductible. If your business is enjoyable and related to your
interests, you might have made some of these purchases anyway and now
they are deductible.

If you are going to have a business for tax reasons, your intent should
be to make a profit at some point. The IRS knows that there are
significant costs in starting a business and that it might not be
profitable for a few years. A general rule is to show a profit within
two to four years. The longer you go without making a profit, the more
likely the IRS might consider your business a hobby and disallow the
deductions you are claiming unless you can show a business plan with a
definite plan to be profitable and show changes when needed to increase
your chances for profitability.

So once again, consider a side-business. It could save you hundreds of
tax dollars every year.