Starting and operating your own home based business is the ultimate tax shelter.

Even though this article has been written from a Canadian income tax perspective, the principles ought to be practical in other tax jurisdictions.

1. Non-Deductible Personal Living Expenses

Every one of us have expenses that we incur in everyday living.

Either you rent an apartment or house or you own your residence. Utilities, insurance, rent, mortgage interest, property taxes, and maintenance and repairs are typical costs of operating your home.

Most likely, you have a car which likewise takes in large amounts of money.

Add to this, dining out, entertainment, gifts, alcoholic beverages, office supplies, telephone and a number of other expenditures, and you have a substantial cash outflow.

In the majority of instances, as an employee, retired person, investor, student, or homemaker, few of these expenses are tax-deductible to you.

This means that you need to earn a substantial income, pay your income taxes first, and then make use of what is remaining to pay all of your expenses.

Several employees may be able to write-off a few of their employment related expenses, if such are required by their contract of employment. Nevertheless, even in this situation, the tax deductions are very limited.

2. Your Own Home Based Business Means Tax Deductions

Now consider the circumstance where you decide to start your own home based business.

Suddenly, several of your everyday expenses are currently being used for business purposes and are now tax-deductible.

If you use one quarter of your home exclusively for business use, you will be able to deduct (or write-off) one quarter of all related occupancy costs. These expenses might consist of maintenance and repairs (that are not capital in nature), rent, mortgage interest, house or apartment insurance, power, heat, water, and property taxes.

At the same time, your vehicle expenses used for business purposes are yet another tax write-off. If you make use of your car 90 % for business purposes, you can deduct ninety percent of your vehicle insurance, gas and oil, maintenance and repairs, car washes, license and registration, auto club, loan interest (within certain limits), along with other costs from your income. You may also write-off 100 % of your business related parking. Capital Cost Allownance (C.C.A.) on your vehicle is also allowed for income tax purposes; depreciation is the accounting term for this  tax deduction.

The Canadian government also allows as a deduction, fifty percent of your business related entertainment expenses.

Also tax-deductible are business related telephone expenses, Internet access, office supplies, travel, books, memberships, and a host of other expenses.

3. Income Splitting with your Home Based Business

If you’ve got a high paying job, you will pay bigger taxes simply because the rates of tax increase as your income does.

With your own business, you can pay fair wages to your spouse and kids. In this manner, you can legally divert income taxed at your higher rate to your members of the family who are in a lower tax bracket.

This tax saving approach is called income splitting. It’s another good reason why your own home based business is the ultimate tax shelter.

4. Even a Part-Time Home Based Business Works

Even if you have a full-time job, running a part-time business can be advantageous.

Of course, you need to really run a real, moneymaking business. Any efforts to write unprofitable hobbies off will eventually fail with the taxation authorities.

If you earned eight thousand dollars during the year from your part-time business and were able to subtract eight thousand dollars in car expenses, home office expenses, entertainment costs, office supplies, along with other business related expenses, you would have a net business income of nil. You would pay no tax on this additional earnings.

Don’t overlook this crucial point! Even though these tax deductions are actual, legitimate business expenses, these are expenditures you would most likely have made anyway, regardless of whether you had a business or not.

Therefore, by rearranging your affairs to start and operate a home based business, you’ve been able to convert non-deductible personal expenditures into legally deductible business expenses. You have effectively sheltered your income from tax and have split your income with family members in lower tax brackets.

Yes, certainly, your home based business has become your ultimate tax shelter.

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