A tax accountant once told me that the Supreme Court had ruled that it was legal to take actions to reduce your tax liability. His advice and knowledge of the tax laws has saved me thousands over the years. Starting a business, whether for your primary source of income or just as a side business, can give you many ways to reduce your taxes. Everyone does something they like to do. Everything you like to do can be a business.
- If you dedicate a percentage of your home for your business, you can deduct that percentage of your utilities and rent as a business expense. For example, if 200 square feet of your home is dedicated to your business in your 2000 square foot home, 10% of your electricity, water, natural gas, and 10% of your rent are all deductible. If you receive equity or title to the property, rent is not deductible.
- If you have multiple vehicles, dedicate one for business use and deduct 100% of its fuel, maintenance, license, registration and insurance or take the mileage deduction, whichever is best for you. Any of your personal vehicles that are used for business can have its mileage deducted when used for business purposes. Keep a mileage log in your car and note the date, starting mileage, ending mileage, and purpose of the trip. Look up the current mileage rate from the Internal Revenue Service’s website for the amount to deduct.
- There are many other business related expenses including shipping, office supplies, cell phones, long distance phone calls, fax machines, computers, memberships, website and advertising costs, as well as any other expense that you incur while operating your business.
There are other ways to legally reduce your taxes when doing things that you may normally do.
- Combine some business with your planned vacations. By doing this, a portion of your airfare, hotel, rental car, meals and entertainment are deductible. If you are lucky and actually have a business that is also your hobby, then it is possible that 100% of your “vacation” is actually deductible.
- Business meetings taken in restaurants or entertainment venues are partially or totally deductible. It is not unreasonable, for example, to have weekly lunch meetings with your business partners or senior managers. It is also not unexpected to have annual holiday parties for the entire company. If your business is structured as a corporation, an annual stockholders meeting is required. All of these meetings that may include travel and eating out are partially or totally deductible.
- Businesses must pay a matching payroll tax when it pays its employees. Depending on the structure of your company, you can take distributions or draws instead of payroll eliminating the associated payroll tax. If your company is a corporation, owners must get a paycheck, but they can also take a distribution or draw. Check with your tax accountant for the best strategy for your business.
While a skilled and knowledgeable tax accountant is the best way to know how to legally reduce your taxes, it is worth it to spend some time each year understanding what tax credits and deductions are available each year. Keep more of your money and enjoy yourself!