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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.
J.
Stephen Pope, President of Pope Consulting Inc.,
http://www.popeconsultinginc.com/ has been helping clients to earn maximum
business profits for over twenty-five years.
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