S M A L L - B U S I N E S S - P R O B L E M - N U M B E R - 6

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?

  • Requirements of a Home Office: To be eligible for the home office deduction for your home-based business, you must meet several requirements:
    • Use your home as your principal office,
    • Use your home regularly for business, and
    • Use an exclusive portion of your home for business

      Note: Principal Office requirement.

      Recently, Congress liberalized this in order to allow most home based businesses and network marketing businesses this deduction. To constitute a principal office, you must render significant management or administration for your business out of your home AND not have another office where you render significant services. Significant management or administration means doing the paperwork for the business in a set spot of your home.

  • How would you like to deduct all of your vacation costs that you have this year? You can, and it is easy to do.

    Most people wrongly believe that they can go on vacation and give out their business cards in order to make the trip deductible.

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 some excellent books:


  • Creative Tax Deductions & Strategies - Read this book in its entirety, put into practice the tax deduction strategies outlined, and join other sole proprietors, self-employed, and small business owners on the path to creating financial freedom. Some of the topics covered by our manual are: Have a blast in your business, entertain more clients, give gifts and travel more. Transform personal expenses into business expenses.  Save yourself, your family and your business hundreds, but more likely thousands a year.  Lower your taxes every year, indefinitely. And most importantly, fund your retirement with incredibly large tax free contributions, all within the guidelines of the tax code. Creative Tax Strategies for Creating Financial Freedom (Volume 2)

  • Sage One Accounting – Our service is online accounting and invoicing software for contractors, consultants, and small business owners with up to 9 employees. It tracks your finances, allows you to bill customers via email and receive payments online, and links with your financial accounts so you can stay on top of your business. A free version is available with no time limit. Online accounting software made simplify life for small business owners. Sage One

Sage One Accounting is simple online accounting software for small business. It gives business owners the essential tools to manage their finances and get paid faster. Sign Up Now for Our FREE version.

  • Taxes for Self-employed Individuals - This course and business guide is only for people who want to save money on tax preparation and are ready to devote a little bit of time learning how to do US Taxes for self-employed individuals themselves. In this course you will learn: How to do a US Tax return for consultants, freelancers, and contractors. What business expenses you can use to lower your tax bill. When and how pay your taxes to stay current, plus much more.  If you want to get the knowledge and stop paying someone else for what you can earn, then this course is for you. We are committed to supporting you. You will get to ask us any questions you have about doing taxes in our discussion forum absolutely free. We are available to help you if you feel stuck, we are just a click away and will answer as soon as we can. (Note that although many of the tips and guidance in this course are related to the USA tax system, our clients have found that these same pointers can usually be also applied to the tax systems of most other countries.) US Taxes For Freelancers How To DIY: Save Big & Pay Less Tax



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