Home Based Business: Your Ultimate Tax
Shelter
Starting and operating your own home based business
is the ultimate tax shelter.
Although this article has been written from a
Canadian income tax perspective, the principles should be practical in other
tax jurisdictions.
1. Non-Deductible Personal Living
Expenses
All 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.
Likely, you have a vehicle which also consumes large
amounts of cash.
Add to this, dining out, entertainment, gifts,
alcoholic beverages, office supplies, telephone and many other expenditures,
and you have a significant cash outflow.
In most cases, as an employee, retired person,
investor, student, or homemaker, few of these expenses are tax-deductible to
you.
This means that you must earn a considerable income,
pay your income taxes first, and then use what is left to pay all your
expenses.
Some employees may be able to write-off some of
their employment related expenses, if such are required by their contract of
employment. However, even in this situation, the tax deductions are very
limited.
2. Your Own Home Based Business Means Tax
Deductions
Now consider the situation where you decide to start
your own home based business.
Suddenly, many of your everyday expenses are now
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 may include maintenance and repairs
(that are not capital in nature), rent, mortgage interest, house or apartment
insurance, power, heat, water, and property taxes.
As well, your vehicle expenses used for business
purposes are another tax write-off. If you use your car ninety percent 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), and other costs from your income.
You may also write-off one hundred percent 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 expenditures.
3. Income Splitting with Your Home Based
Business
If you have a high paying job, you will pay higher
taxes because the rates of tax increase as your income does.
With your own business, you can pay reasonable wages
to your spouse and children. In this way, you can legally divert income taxed
at your higher rate to your family members that are in a lower tax bracket.
This tax saving technique is called income
splitting. It is 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 must actually run a real, moneymaking
business. Any attempts to write unprofitable hobbies off will ultimately fail
with the taxation authorities.
If you earned eight thousand dollars during the year
from your part-time business and were able to deduct eight thousand dollars in
car expenses, home office expenses, entertainment costs, office supplies, and
other business related expenditures, you would have a net business income of
nil. You would pay no tax on this additional income.
Don`t miss this important point! Although these tax
deductions are actual, legitimate business expenses, these are expenditures you
would probably have made anyway, whether you had a business or not.
Thus, by rearranging your affairs to start and
operate a home based business, you have been able to convert non-deductible
personal expenditures into legally deductible business expenses. You have
successfully sheltered your income from tax and have split your income with
family members in lower tax brackets.
Yes, indeed, your home based business has become
your ultimate tax shelter.
More Canadian
Income Tax Resources
IBRCC
- Corporate and Personal Canadian Income Tax
Support
In tax planning, knowledge is cash in your pocket. Any form of
tax planning where your affairs are arranged within the framework of the law to
minimize your taxes, is perfectly legitimate and legal.
taxtips.ca
- Filing your Canadian Income Tax Return
Taxtips.ca
- Detailed information on tax credits, deductible expenses, filing due dates,
penalties and interest, and other important tax return filing information.
Canadian
Income Tax Tips
Find what you need to file your personal
Canadian income tax returns, including information on electronic filing, the
income tax package, forms and schedules, and supplementary information on
income tax benefits and deductions.
TOS
- Canadian personal income tax preparation, tax
consultant, tax...
Tax & Office Services -
Canadian personal income tax preparation, tax
consultant, tax planning & office services in Maple Ridge, Pitt
Meadows & Port...
http://www.toscanada.com/
Ask
an Expert your Canadian Income Tax Questions.
Ask
an Expert your Canadian Income Tax Questions. E-Mail your
questions and receive an answer from a Canadian Income Tax
Expert with over 20 years...
http://www.mondata.com/taxaction/expert.htm
Canadian
Tax Foundation
A non-profit tax research organization
analysing personal, corporate, and international tax and government
finance matters.
http://www.ctf.ca/
Canadian
Income Tax Preparation | Canada Tax Return
Canadian income tax preparation including your Canada
tax return by Trans Canada Tax Service. Corporate or personal
taxes.
http://www.transcdatax.ca/
Looking
for Your Income Tax Refund?
Three ways to check on the
status of your Canadian income tax
refund.
http://canadaonline.about.com/b/a/148174.htm
Welcome
to the Canada Revenue Agency | Bienvenue à l'Agence du...
Provides information, services, and applications that help promote compliance
with Canada's tax legislation and
regulations.
http://www.ccra-adrc.gc.ca/
