How
to avoid unnecessary income tax on your earnings from the business,
and how to legally use your "expense" accounts
One
of the greatest problems with starting your own business, is that
you are forced or compelled to take in a "partner"
who was not even invited. Who is this culprit? It is the Tax Man!
He will want a big share in your profits, and also as ridiculous
as it may sound, he will NOT share in any of your losses. Can
you believe this? It's true nonetheless
It's
not easy starting and running your own business with this
fact staring you in the face. A word of advice from one of our
associates is that you must enjoy what you do in your business
venture. You'll never achieve real success unless you like
what you are doing. This applies regardless of the type of
business you choose to start or buy.
Your
chances for success will be directly proportional to the degree
of pleasure you derive from what you do. If you have a job you
hate, face the fact squarely and get out. Work is a reward,
not punishment. If you enjoy what you do, you'll be successful.
If you don't enjoy what you do, you won't be successful. Your
success in any occupation depends on your enjoyment. Loving your
work will make all the difference.
Success
in its highest and noblest form, calls for peace of mind, enjoyment,
and happiness. This comes only when you find the work that you
like best.
Success will bring rewards in the form of profits from your business,
and even though you may have started your venture as a hobby,
it soon grows and becomes a real entity, with a character of being
a business.
When do you have to face the fact of bringing this to the notice
of the taxman?
The IRS (Internal Revenue Service) notes that if you have
a profit for three out of five consecutive years (five out of
seven for horses), you are presumed to be a business. However,
even if you don't have the necessary profit, you can still have
many years of losses if you run your endeavor with a "reasonable"
expectation of profit.
-
There
are a number of factors that the Internal Revenue use in making
this determination.
- One
of the biggest and most important factors is whether
you have a business plan. This is a five-year
projection of income and expenses. Your business plan should
at some year in the projection show a profit. We cannot
overstate the importance of this. Read more on our web page
about Business
Plans
- You
should also have a marketing plan built in
to your business plan showing your projected marketing activities.
Read more about Marketing
Plans and software whch helps you to prepare a professional
looking Plan. The package includes over 70 sample marketing
plans and covers all types of businesses and is highly recommended.
Marketing
Plan Pro
- Another
factor is whether you have the appropriate documentation.
Businesses have correct and detailed records. Businesses
keep tax diaries. Hobbies do not.
- You
should also work in your business regularly.
This means working in your business at least 45 minutes
per day, four or five days a week. It is much more beneficial
to work a business four hours a week then to put in eight
hours in one week and none in the second week.
- Business
owners go to training that should be documented.
In addition, if business owners don't have a profit in one
year, they don't repeat the same mistakes. Insanity is expecting
different results doing the same thing, and the taxman will
think you insane or a crook. Read more about online
courses available.
The
first hurdle you have to face is keeping accurate records.
Fortunately the taxman is very helpful in this regard and has
supplied ample information for you to consult. Visit this link
"Starting a Business and Keeping records from the IRS."
This is a PDF file and is an absolute essential reading for
entrepreneurs. Click
here
We
also recommend that you use the software "Quick Books"
which is easy to understand, but if you need help, go to our
"Online Course" page click
here and select the category, "Quick Books Fast Track
Courses." (Ref.MTC 510-A(SD) For more details
click
here. Or if you prefer, we can undertake your bookkeeping
for you.
-
Accounts
Keeping - Our Company provides Online Bookkeeping for
small businesses, Individuals, Retailers and contractors. Bookkeeping
services are provided with Quickbooks accounting software. Bookkeeping
services are offered at competitive rates, which are only a
fraction of the cost a business owner would incur with his regular
accountant or bookkeeper. Contact
us.
We
now look at two areas, which are prominent in our list of business
expenses.
A
major issue is how to claim your home as an office expense.
Is it allowed and is it legal?
You
must have at least one or more business appointments before
you leave. IRS, in fact, requires you to have a business purpose
incurred before you leave for the trip.
The first thing that you need to do is to set up appointments
in various cities or countries before you leave for the trip.
The best way to establish this is for you to put advertisements
in the newspaper looking for distributors. You could then interview
them when you get to the business destination.
It would be vital for you to document this business purpose
by keeping a copy of the advertisement, noting what appointments
that you will have in your diary, and noting what presentations
you will be going to perform. Keeping copies of all correspondence
would also be very helpful.
There are many other tips and suggestions that you can
employ in using basic business "expense account"
items, but we encourage you to think carefully before you place
them in a "business expense account." This will
require that you do some reading and research on this subject.
You may contact
our firm for ideas currently used by many of our clients.
-
Major
tax myths which you should be aware of are:
1. We hear you ask,"I heard that I had to have a profit
for three out of the last five years."
This is only partially true. The tax law provides that if you
run your business like a business and not like a hobby, you
can use the losses as discussed above. If you are deemed to
be hobby, your losses from your endeavor are limited to the
income from the endeavor with no carry back or carry over.
There is a presumption that if you have a profit three out of
the past five years, you have a business profit motive. However,
the important point about this widespread myth is that this
is a presumption that can be rebutted.
However,
basically you need:
-
A
five year projection of income and expenses, which will project
an eventual profit
-
A
marketing plan
-
A
good tax organizer and good documentation
-
Working
your business at least 45 minutes a day, four to five days a
week
-
Attendance
at training
-
Consultation
with experts
-
Changing
the way an activity is marketed from year to year especially
if no profit is shown. Thus, this presumption can be overcome
with proper knowledge and some simple planning.
2. You might also be saying, "Keeping good records isn't
worth the time or expense."
This is also a major mistake. We estimate that most people
can be audit proof by keeping records that would take no longer
than 3 minutes a week. This is about 150 minutes a year, which
is about 2.5 hours a year. This may, at first, seem like a lot
of time, but this would save approximately $4,000-$15,000 in
taxes. Even using the low-end figure, this averages to be about
$1,333 per hour and it is tax-free. We bet that you don't earn
this in an hour
Be aware that certain legal requirement are laid down regarding
registration of your business, and this will convince the
IRS that are "in business" and you mean "business."
Read more about this issue on our Business
Problem No.4 Page
To read the full list of tax tips, click
here and select "Articles and Tips" and
the item "Starting Up A Business." (To obtain a
10% discount, please enter the coupon code "Delamere"
in the Shopping Cart page.)
Many
of our clients prefer to use the services of a tax consultant
and we invite you to visit our web page for details of available
services. For additional reading and research we are recommending
two excellent books,
-
-
-
What
Every Small Business Owner Should Know About Their Taxes
- Discover hundreds of small business tax tips, techniques
and strategies, all designed to keep your hard earned money
where it belongs, in your pocket. No matter what kind of
business you own, full-time or part-time, out of your home
or out of an office or store, this information applies to
you. Click
Here!
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