Unlocking Tax Benefits of Owning a Small Business
Starting a small business is a great way to follow your passion while generating an extra source of income. But they aren't the only benefits for full-time workers. With the right approach, starting a business for tax purposes can save thousands of dollars for you and your family.
This article will examine some compelling advantages of creating a business for tax purposes.
Why Starting a Business Can Be a Game-Changer for Your Taxes
Before we explore how to start a business for tax purposes, we need to look at why you should do it in the first place.
The US government incentivizes people to start businesses to stimulate the economy and increase employment. To do this, they provide a range of tax deductions that reduce business startup costs and expenses.
A business can claim income tax deductions on various expenses, including rent, utilities, travel, services, computer equipment, and more. These deductions allow you and your spouse to save money on your full-time income taxes.
To unlock the tax benefits of owning a business, your new venture must make legitimate income. There are two broad categories of expenses that you can deduct from your taxable income. Let's explore them both.
Startup cost expenses
Starting a business costs money in several different ways. The IRS recognized three different categories of expenses that you can incur while getting a business off the ground.
If you start a new business, you can deduct the costs of:
- A) Creating your business: This includes research, competitor analysis, exploring potential investments, and so on.
- B) Preparing your business: Legal fees, equipment, training, advertising, etc.
- C) Organizing your business: This category covers incorporation expenses, accounting fees, company director's salaries, etc.
If you start a business for tax purposes, it creates some opportunities, but there are parameters you need to be aware of. For starters, you can deduct up to $10,000 ($5,000 for startup costs and $5,000 for organizational costs). However, this only applies if your startup costs are below $50,000.
The next category of permitted tax deductibles is business expenses. Again, there are a lot of outgoings that you need to pay to operate a business. Some of these include:
Rent: If you have a dedicated home office that is used solely for your business, you can deduct a portion of your rent, mortgage, property insurance, and property taxes.
Utilities: Gas, energy, electricity, internet, water, and more are tax deductible.
Eating out: Business meetings over lunch qualify for a 50% tax deduction.
Transportation: If you travel for business purposes (but not commuting), you can claw back mileage and gas as tax write-offs.
Furniture and equipment: Business furniture like desks, chairs, and filing cabinets, and
business equipment, such as computers, are all deductible, too.
Learning and development: Employee training, courses, workshops, and supporting materials like books all qualify.
This list is not exhaustive. It's just here to illustrate the tax benefits of owning a small business.
How does starting a business help with taxes?
If you start a business to reduce taxes, you can use tax deductibles to reduce up to $10,000 from personal income tax a year before you "open your doors." Then, once the business is rolling, you can start to deduct other expenses from your income tax, too. This process can lead to a lot of savings.
Now, it's important to note that starting a business for tax benefits is different from starting a business solely for reducing your personal income tax. These are two very different things, per the IRS.
One thing that you need to show is that your business is being run with the aim of generating a profit. If you can't show that, the IRS will look at your venture in one of two ways:
- A) That it's a hobby, which means it is not eligible for tax deductions
- B) As a brazen attempt to game the tax authorities.
Neither scenario is good, but scenario B is much worse because it can result in an investigation and even penalties.
Now, this is one reason why you should employ the services of an accountant if you want to start a business for tax purposes. They can advise you on everything that you need to know about starting a legitimate company that is focused on turning a profit.
What's more, an accountant can help you gather the information like receipts and accounting records that support your case of opening a bona fide business, as well as ensure that you can save the maximum amount on your income taxes.
If you only start a business for tax purposes, the chances of being exposed and penalized are high. So, we would recommend that you only try to reduce your income tax in this way if you have a genuine interest in running a business.
The other thing to consider is that your business does not have to turn a profit to be eligible for tax deductions. Again, this is important because, as any small business owner will tell you, starting a new venture is hard work, and making profits is difficult.
So, to recap, you can reduce your personal income taxes if you start a new company. This company should be legitimate and not solely conceived as a vehicle for reducing your tax. Your venture must make a sincere attempt to turn a profit. However, you don't need to be a successful small business to avail of tax credits for startup costs and business expenses.
Next, we'll take a look at some of the best businesses to start for tax write-offs.
Best Business Ventures to Maximize Tax Write-Offs
So, what is the best side business for tax write-offs? Well, there are a few different ways to answer this question.
Firstly, the best business to start for tax write-offs depends on each individual. You need to make a legitimate attempt to turn a profit, which will require an investment of both time and money. Therefore, it will be a huge help if you already have experience, passion, contacts, and even qualifications within a particular sector.
The next thing to consider is that certain types of businesses have more write-off opportunities. So, the best business that you can start to help you save on income tax will include a blend of both of these considerations.
If you already work full-time in a particular sector, your experience and know-how can prove invaluable to other people. Consulting can involve lots of traveling and staying in hotels, or you can operate everything from your home office. Either way, your expenses are eligible for tax credits.
Some of the tax write-offs you can unlock include marketing and advertising, traveling, home office costs, and evening learning and development courses.
Coaching has exploded in popularity in recent years. There are so many types of coaches, with people specializing in business, health, wellness, fitness, and careers, as well as more personal development-focused areas like life coaches.
Again, if you run your coaching services from your home, you claim for a portion of your rent or mortgage, utilities, internet, phone bill, gas, and any supplies you use to teach your students.
From graphic design or writing to video editing or coding, there is a huge demand for freelance workers. Most of these businesses can run from home, which provides one avenue for tax deductions. However, you can also write off computer expenses, phone bills, internet, and any equipment you use to deliver your service.
There is a never-ending amount of reselling opportunities in the Internet age. From buying in bulk from distributors and selling items individually to flipping thrift store items and selling online, there are tons of ways to make money.
Some of the expenses you can write off include rent and bills, shipping costs, and, most crucially, the money you spend on your inventory.
Interior design is always in vogue, so if you have an interest and a passion for color, art, furniture, and fixtures, this could be the job for you.
Like some of the other business ideas listed above, you can do this job from your home and travel to meet clients. As such, that will help you qualify for travel mileage and gas, plus the tax benefits of running a home office, including rent and mortgage deductions.
Home crafts is a great side hustle, thanks to online platforms like Etsy. Naturally, you'll need to be creative if you want to make jewelry or other decorative items that people want to buy.
However, if the idea appeals to you, you can do simple things like make and design t-shirts.
Running out of your home means that you can use a portion of your property as a studio and claim back tax based on that space. What's more, utilities, internet, phone bills, and your work-related computer can also help cut down on income tax. Throw on top shipping costs, stationary, materials, and marketing expenses, and you can really eat away at your tax bills.
A rental business is another excellent side hustle. Perhaps the most attractive thing about going down this route is the sheer variety of opportunities. Some of the things that you can rent are sports equipment, bouncy houses, trailers, bikes, boats, party supplies, or beach gear.
With a whole host of rental platforms available, you don't even need to spend too much time getting your business up and running.
Some of the write-offs you can enjoy will come from operating from your home (rent/mortgage, utility bills, computers), while other breaks will come from buying inventory, marketing, and depreciation of your assets.
For people who already have a full-time job, this kind of side hustle can be confined to weekends only. That can give your finances a boost without compromising on precious work-life balance.
Cakes and foods
Plenty of people have developed a passion for baking over the last few years, so it could be that perfect mix of doing what you love while reducing your income tax bill.
A home bakery business can qualify for rent or mortgage deductions, as well as gas, electricity, and other utilities. Promoting your business will also create write-offs from advertising, and so will purchasing equipment. However, if you add a delivery service into the mix (no pun intended), then you can start to claw back on gas, mileage, and lease payments, too.
Tutoring or online course creations
If you have a qualification or expertise in a specific subject, you can become an online tutor. Working from home has lots of tax benefits, as outlined above, but you can also write off your supplies and computer costs, alongside some of your phone and internet costs.
Online course creation works a little differently, for the most part, because you can sell on-demand content that is scalable and capable of producing passive income.
Any training and courses you do to get up to speed in your niche are tax deductible. So, too, are attending networking events and marketing your business via online ads and more. Software and website creation are also eligible for write-offs, meaning you can invest money up front, save on income tax, and be left with a business that quietly generates money while you work.
How do founder-led businesses maximize their tax benefits?
Maximizing tax benefits starts with awareness of what qualifies as a write-off and an understanding of how the system works. Working with an accountant or bookkeeper gives founder-led businesses the inside track on taxes while allowing them to concentrate on running their company.
What are the top tax write-offs for small business owners?
A lot depends on the nature of your business. However, if you run your venture from your home, you can deduct some of your rent or mortgage, utility bills, and property tax by starting a small business. Throw on top deductibles for driving and gas, and you can save a good amount on bills that you are already paying.
How does Wilkins and Co. advise businesses to leverage tax advantages?
There are many tax benefits of starting a business that people are entirely unaware of. We tell clients how to start a business for tax write-offs and advise them about the deductibles that will impact their income tax. Taking advantage of these write-offs requires meticulous record-keeping and solid strategies; we can help with both.