Why Own a Small Business Part 4 of 4
I hope you’ve benefited from my series on Why Own a Small Business. With this part four, I have some closing wrap ups for you.
Here’s the first three articles in my 4 part series:
It’s important for you to keep in mind that taxes are neither fair nor logical, and this becomes painfully obvious the more you learn about the Tax Code and the role of the Internal Revenue Service (IRS).
Furthermore, IRS Tax Code is subject to change at a moment’s notice.
The United States Congress approves taxing concepts; then the IRS is responsible for writing the Tax Code, which is the set of rules and regulations (in the form of tax law) detailing the specific rules that all tax payers must follow in the preparation, filing, and paying of their taxes.
Then the U.S. Congress passes tax law reflecting the Tax Code created by the IRS. The IRS is empowered to administer and enforce all federal income tax laws and to collect all pertinent taxes.
It’s very difficult (and for the most part a complete waste of your time) for you to dive into the IRS Tax Code in an effort to understand all the details and to stay current with all the changes.
Fortunately, there are good CPA’s in every town, city, and state to help you apply creative strategies to take as many tax deductions that you qualify for. In order to take these advantages of the very favorable tax laws applicable to small-business ownership, interview tax advisors for their knowledge of tax saving, not just filling out your tax return but providing good tax counsel.
The rationale behind the IRS and Congress using tax law to engage in social engineering regarding small-business owners (creating tax law that leads small-business taxpayers to take actions that are good for the economy as a whole) is that it is becoming evident that the future success of the U.S. economy is increasingly dependent on the growth of small businesses.
For example, it is estimated that upward to 60 percent of the future growth in jobs will be directly attributable to small businesses—their creation and subsequent growth. Therefore, it’s beneficial for the economy to give breaks to these small businesses that will allow them to succeed.
In the final analysis, it’s up to you! Small business owners can enjoy two distinct benefits:
(1) the profit that the businesses generate (profit that is under the control of the business owners and can be used as they see fit) and
(2) tremendous tax savings (the opportunity to convert personal expenditures into tax-deductible expenses and thus to enjoy considerable tax savings). Remember, you can enjoy profits and tax savings no matter what size your business is; small businesses are just as able to generate both profits and tax savings as larger businesses.
The goal in applying small-business tax strategies is to match all the allowable business tax deductions of your business against the taxable (gross) income of the business. In this manner you will minimize its taxable income.
Employees: Get Your Paycheck and Pay Taxes FIRST
If you work for someone as an employee, the income you generate (in the form of W-2 wages) is subject to income taxes. This means that before you can spend any of these dollars, you must first pay all federal and state (if applicable) income taxes due. The tax due can amount to tens of thousands of dollars—drastically reducing the after-tax dollars you have available for your personal use.
Small/Home Based Business Owner: Total Your Income, Deduct Expenses, Pay Taxes SECOND
However, when you become a small business owner, tax law turns in your favor. You no longer have to pay taxes first, before you spend the profit your small business generates. Before you calculate any taxes due on business profit, you may first deduct the dollar amount of any and all “ordinary and necessary” expenditures that your business has incurred (in pursuit of profit).
Although these tax-deductible expenditures must be related to your business, you’ll soon find that many personal expenditures—for travel, cars, home, and even entertainment—become tax-deductible business expenses. As a small business owner, you can literally make your life tax deductible.
As an individual (nonbusiness) taxpayer, your federal marginal income tax rate will be anywhere from 10 to 39.6 percent of all the income that you earn. Your goal should always be to maximize your tax deductions in order to minimize your taxable income, and therefore to minimize your income tax due.
As an individual (non business) taxpayer, the number and dollar amount of potential tax deductions is severely limited.
When you own your own business, however, you literally have the opportunity to make your life tax deductible.
This means that the items you paid for out of after-tax dollars (i.e., after paying any taxes due) as a non business owner, you can now pay out of pre-tax dollars (i.e., before paying any taxes due)—thus drastically reducing your taxable income and therefore your total income tax liability.
Most people are not in a position to fork out thousands of dollars for a start up. The best solution for putting yourself in a position to take advantages of tax benefits allowed for small business owners is to have a home based business.
There are many great home based business options for you to consider as some of the best products on the market are offered through this marketing style. Consider the products, commissions paid and long term leverage with residual income along with the stability and reputation of the company.
I have a home based business in my portfolio and if you’d like to know more about that, just reach out and we’ll chat.
All The Best,
Disclaimer: Always verify with your tax adviser and current federal tax law before making any tax decisions.