Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Lowering Taxes
Old 12-18-2008, 08:07 PM   #1
Recycles dryer sheets
 
Join Date: Apr 2008
Posts: 223
Lowering Taxes

I have seen several books (Lower Your Taxes!, Asset Protection 101, all books on small business taxes) claim that anyone who is serious about lowering their taxes must start a home-based business. What is the rationale behind this? I think they are advocating starting a part-time business in addition to a person's current employment? How does it reduce taxes?
__________________

__________________
inquisitive is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 12-19-2008, 09:37 AM   #2
Recycles dryer sheets
SteveL's Avatar
 
Join Date: Aug 2005
Posts: 380
Theoretically, a home-based business would allow you to deduct a portion of the expenses of your home against the income from the business. Potentially, this could include a portion of your utilities, taxes, depreciation.

The devil is in the details. To be a real business instead of a hobby, (and thus deductible) your venture needs to make a profit ($1) at least two years out of every five. Generally, start-ups will lose money for a number of years, so you need some kind of business which will actually make enough to produce a profit before you can deduct expenses of your home. Also, the IRS sees these as scams and will audit much more frequently.
__________________

__________________
SteveL is offline   Reply With Quote
Old 12-19-2008, 10:28 AM   #3
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
TromboneAl's Avatar
 
Join Date: Jun 2006
Posts: 11,197
I agree with Steve. But if you can run a successful small business:

You can deduct all medical, vision and dental expenses (by implementing a company reimbursement plan).

You can contribute to a SEP-IRA (probably you can contribute more than to an IRA).

You can legitimately hire your family members, and deduct their medical etc.

------------

I wouldn't recommend starting a small business just for the tax benefits.
__________________
Al
TromboneAl is offline   Reply With Quote
Old 12-19-2008, 10:36 AM   #4
Moderator
ziggy29's Avatar
 
Join Date: Oct 2005
Location: Texas
Posts: 15,612
Quote:
Originally Posted by TromboneAl View Post
You can legitimately hire your family members, and deduct their medical etc.
This is true, but it's also another potential audit red flag. You want to make sure you're not paying them much more than the prevailing wage for what they do, particularly if they are your kids in a lower tax bracket than you.

Let's say you hire your teenage daughter to do some stuff for your business. If you pay her $60 per hour to perform 100 hours of administrative work when the going rate is $10-15 per hour -- taxed at her very low earned income tax rate instead of your higher rate -- it can get the IRS sniffing at your door. They may see it as an attempt to get more of your business income taxed at her lower rate by paying her a ridiculously high wage that you'd never pay outside the family.
__________________
"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)

RIP to Reemy, my avatar dog (2003 - 9/16/2017)
ziggy29 is offline   Reply With Quote
Old 12-19-2008, 10:55 AM   #5
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jun 2005
Posts: 8,616
I work for an employer. All my contributions to the health care plan are already deducted. I also participate in the flexible spending account (FSA) so that all my out-of-pocket health care expenses are also with tax-free money.

I do a small amount of consulting outside of my normal work. If I spent all the money on expenses then I would pay no taxes on that money. Of course, I would have no money to spend on anything else. The trick is to make "expenses" things that you would have to pay for anyways. I always deduct all my professional subscriptions and books ... until I decided that I didn't even need these so those expenses went away. I could take "clients" out to dinner and deduct a portion of those meals.

You see folks that do this all the time: They are the ones who have their kids in their TV and print ads (doctors, dentists, lawyers, car salepeople, furniture salespeople, real estate people, etc.). They drive vehicles with their business name plastered on them. I imagine that these folks are generous when pro-rating the use of their vehicles and home between business and non-business use.
__________________
LOL! is offline   Reply With Quote
Old 12-19-2008, 12:04 PM   #6
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Sep 2005
Location: Northern IL
Posts: 18,278
There is a very simple way to lower your taxes, if that is the goal. Give money to charity. It becomes an 'expense' that is deductible, and if properly documented will cause no red flags. And the money might do some good for someone.

That's really all these plans are, just wrapped up in details so they can charge you for their advice. Getting a tax deduction on an expense can't happen w/o the expense. Spend $100 to save $25? I can do that on the sale items in stores

Like others have said, you can get creative and shift regular expenses to business expenses, but creative = read flag.

-ERD50
__________________
ERD50 is online now   Reply With Quote
Old 12-19-2008, 12:10 PM   #7
Moderator
ziggy29's Avatar
 
Join Date: Oct 2005
Location: Texas
Posts: 15,612
Quote:
Originally Posted by ERD50 View Post
There is a very simple way to lower your taxes, if that is the goal. Give money to charity. It becomes an 'expense' that is deductible, and if properly documented will cause no red flags. And the money might do some good for someone.
True -- if you itemize. Those of us with small, paid-off homes (or who rent) are unlikely to be able to do so -- especially in states with no income tax.
__________________
"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)

RIP to Reemy, my avatar dog (2003 - 9/16/2017)
ziggy29 is offline   Reply With Quote
Old 12-19-2008, 12:49 PM   #8
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Sep 2005
Location: Northern IL
Posts: 18,278
Quote:
Originally Posted by ziggy29 View Post
True -- if you itemize. Those of us with small, paid-off homes (or who rent) are unlikely to be able to do so -- especially in states with no income tax.
Another example of how screwed up our tax system is. If they want to 'subsidize' charitable contributions, then just do it. But no, they need to wrap it up in complex rules.

Why should a dollar of charitable contribution be subsidized more when a high tax bracket person donates it, than when a low tax bracket person donates it? To the charity, a dollar is a dollar.

Come to think of it, if you want to complicate it, the complication is backwards. Seems to me a low income person needs more incentive to donate than high income person. It is the high income person that should be getting a lesser deduction (%-wise).

< Before posting, I deleted the following comments that I typed after realizing we are not in the soap box - I'm sure you can fill in the blanks, rant, rant, rant, congress, rant, rant, rant >

-ERD50
__________________
ERD50 is online now   Reply With Quote
Old 12-19-2008, 12:58 PM   #9
Thinks s/he gets paid by the post
 
Join Date: Feb 2007
Posts: 1,905
A small farm is also a great way to lower taxes. The rules are a little more liberal (2 years out of 7 for profit requirements) and its much easier to deduct expenses because just about everything you do is related to the farm.
__________________
ejman is online now   Reply With Quote
Old 12-19-2008, 01:01 PM   #10
Thinks s/he gets paid by the post
Bimmerbill's Avatar
 
Join Date: Jan 2006
Posts: 1,631
Don't forget flexible spending accounts for medical expenses. Also, dependent care flexible spending accounts (for kids or adults). $5K each, for a total of $10K. Plus the 401K deductions (if elegible), property taxes, mortgage interest. Heck, my plan allows us to deduct our health care premiums "pre tax."
__________________
Bimmerbill is offline   Reply With Quote
Old 12-19-2008, 02:12 PM   #11
Thinks s/he gets paid by the post
frayne's Avatar
 
Join Date: Oct 2002
Location: 19th Hole
Posts: 2,529
All depends on your situation, the easiest and probably the best way to lower your tax liability is to contribute to an IRA, 401K, 403B, etc. If you own your home and are paying it off, the interest is a deductible expense and in most cases you can come up with more itemized deductions which should beat your standard deduction amount, thus lowering your taxable income.

As far as a home office or business, there is a catch phrase in IRS Pub 17, that uses the language, "used regularly and exclusively for the business." A home office/business in and off itself for the sole purpose of reducing your tax liability will probably cause you more grief with the IRS than it is worth if you ever get audited. Just my two cents and I wouldn't chance it or recommend it unless you have a legit need and use for a home office/business.
__________________
frayne is offline   Reply With Quote
Old 12-19-2008, 04:58 PM   #12
Moderator
Alan's Avatar
 
Join Date: Jul 2005
Location: Eee Bah Gum
Posts: 21,093
Quote:
Originally Posted by frayne View Post
As far as a home office or business, there is a catch phrase in IRS Pub 17, the uses the language, "used regularly and exclusively for the business." A home office/business in and off itself for the sole purpose of reducing your tax liability will probably cause you more grief with the IRS than it is worth if you ever get audited. Just my two cents and I wouldn't chance it or recommend it unless you have a legit need and use for a home office/business.
This is what put us off taking deductions for a home office when DW spent 2 years as an independant computer programmer, working herself back into the job market after 13 years as a stay at home mom. She worked primarily on small projects for a couple of companies. Most of the work was done at home plus some trips to the work sites. She was able to claim mileage expenses, plus costs for postage, stationery, new computer, printer/fax. We maintained an auditable record of all work and trips.

The big payback of course was being hired on by one of the firms she did work for
__________________
Retired in Jan, 2010 at 55, moved to England in May 2016
Now it's adventure before dementia
Alan is offline   Reply With Quote
Old 12-19-2008, 06:26 PM   #13
Recycles dryer sheets
 
Join Date: Apr 2008
Posts: 223
Quote:
Originally Posted by SteveL View Post
Theoretically, a home-based business would allow you to deduct a portion of the expenses of your home against the income from the business. Potentially, this could include a portion of your utilities, taxes, depreciation.
Quote:
Originally Posted by frayne
As far as a home office or business, there is a catch phrase in IRS Pub 17, that uses the language, "used regularly and exclusively for the business."
It sounds like I wouldn't be able to qualify for the first quotation due to the wording in the second quotation.

Another small business idea: With a small business, taxes can be reported on an accrual basis instead of as a cash basis. If business purchases can be made one year and not paid for until the next year, it can be deducted on the current year's taxes. This could provide quite a savings (Obviously it wouldn't make sense to start a business just for this reason, but if going to start a small business anyway this could really help).

Can business and personal taxes be filed together? That is, a small business deduction be taken from my non-small business income?

Another idea I just thought of to lower taxes is to get an interest free loan on the purchase of a house, as that would provide tremendous tax benefits over the long run (I'm assuming there's no limit to interest deductions) The assumptions are that I would hold onto the property and had investments that would appreciate faster than the increased payments I am making over the long run in an interest-free loan.
__________________
inquisitive is offline   Reply With Quote
Old 12-20-2008, 10:13 AM   #14
Recycles dryer sheets
SteveL's Avatar
 
Join Date: Aug 2005
Posts: 380
If you are a sole proprietor (as opposed to a corporation or LLC) you will file your business taxes using sched C with your 1040. If your C shows a loss, this will carry over to your regular income and reduce it. However, your business must produce a profit at least two years out of every five!

I think you mean interest-only rather than interest-free. There would be no interest paid on an interest free loan.

I would like to repeat what others have said. You are thinking about this in reverse. What is your business idea? What will you make or sell, or do? How will you do enough of this to make it worthwhile? Tax planning is just one element of business planning, and far from the most important, or even something to consider in the early stages of planning a business.

Suggest you visit SCORE | Counselors to America's Small Business | SCORE and read up on small business planning.
__________________
SteveL is offline   Reply With Quote
Old 12-20-2008, 10:25 AM   #15
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Gone4Good's Avatar
 
Join Date: Sep 2005
Posts: 5,381
Quote:
Originally Posted by inquisitive View Post
I have seen several books (Lower Your Taxes!, Asset Protection 101, all books on small business taxes) claim that anyone who is serious about lowering their taxes must start a home-based business. What is the rationale behind this? I think they are advocating starting a part-time business in addition to a person's current employment? How does it reduce taxes?

If you have a business idea that you wan't to pursue, start a business. If you're just looking for a way to reduce your taxes, you're likely heading for trouble.
__________________
Gone4Good is offline   Reply With Quote
Old 12-20-2008, 05:59 PM   #16
Recycles dryer sheets
 
Join Date: Apr 2008
Posts: 223
Quote:
Originally Posted by SteveL View Post

I think you mean interest-only rather than interest-free. There would be no interest paid on an interest free loan.
Right.

Quote:
I would like to repeat what others have said. You are thinking about this in reverse. What is your business idea? What will you make or sell, or do? How will you do enough of this to make it worthwhile? Tax planning is just one element of business planning, and far from the most important, or even something to consider in the early stages of planning a business.
I have actually wanted to start a business for some time now, but I've been independently reading about taxes and wanted to see if I could combine the 2. Any tax benefits will probably be minimal since the business I am planning will not allow me to shift expenses I already have to a business, or use a home office, or hire others (since I will be a sole proprietor), rather it's just going to be a second source of income. I'm going to continue looking at other ways of reducing taxes since it's just a huge expense every year.
__________________
inquisitive is offline   Reply With Quote
Old 12-20-2008, 08:17 PM   #17
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: May 2004
Posts: 11,615
Quote:
Originally Posted by inquisitive View Post
Right.
. . . rather it's just going to be a second source of income. I'm going to continue looking at other ways of reducing taxes since it's just a huge expense every year.
That's probably smart. A small business dreamed up solely as a means to reduce taxes is unlikely to be worth the trouble. But if you are trying to earn money, this can be a good way to save on taxes and also put some money into a more favorable tax category.
- The Medical Savings Accounts (or whatever they are now called) can save you some money.
As a sole proprietor, you can start a solo 401k (or a Roth Solo 401K). This allows you to put away more $$ into a tax-deferred retirement account than you can with a SEP IRA (which is also not a bad way to do this). Here's a link to a site comparing the two plans. Basically, as SEP IRA allows you to save 25% of the earnings from the side business (up to contribution cap of $45,000). The Solo 401K allows you to make this same contribution plus another fixed contribution of up to $15,500 (increased to $20,500 if you are over 50 YO). So, depending on how much this side business earns, you might be able to put every penny into a tax-deferred retirement account. If you did this, you might reduce the amount of after-tax savings you are presently doing from your primary job.

(Subsequent edit: These are 2008 figures)
__________________

__________________
"Freedom begins when you tell Mrs. Grundy to go fly a kite." - R. Heinlein
samclem is online now   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Lowering my Adjusted Gross Income tricky88 Young Dreamers 14 03-01-2008 05:14 AM
Taxes, Taxes. Taxes mickeyd FIRE and Money 1 02-09-2008 01:18 PM
Wow, ML lowering broker pay! The Vanguard factor? mickeyd Other topics 0 02-06-2006 12:42 PM
Do you do your own taxes? maddythebeagle FIRE and Money 45 12-21-2005 07:46 PM
Taxes in FI = Is this right? Guest FIRE and Money 9 02-28-2005 05:08 PM

 

 
All times are GMT -6. The time now is 11:02 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.