Yeah, this article is about using a business to put money in your pocket. And your response may very well be, Well, d’oh.
The point of starting a business is to make money.
Freedom to make your own hours. Freedom to work only with people you want to work with. Freedom to build, to change, to start and to stop.
And all of that freedom is possible because you make money with your business.
In today’s article, we’re looking at an additional way to make money with your business. You make it with the tax savings. And unlike net income after you pay all the expenses, tax savings is money you put in your pocket right away from day one.
Most businesses take an average of 3 years to first become profitable. Tax savings occur right away.
If you don’t have a business yet, an online business is a way to quickly get started. And an online business is way cheaper to start than a more traditional bricks & mortar business.
#1: Make sure your online business is truly a business.
Your online business will likely become profitable (with cash flow in your pocket) before a regular bricks & mortar business does. The beauty of business, though, is that you can have actual positive cash flow and yet still show a loss on your business for tax purposes.
That’s because your business is able to take a deduction for regular expenses you have in everyday life. As long as you can prove a business purpose, anything that shows it is an ordinary and necessary business expense, is deductible.
There is one trick, though.
You have to show you actually have a business in the eyes of the IRS. It is possible to get a bit of a pass for the first 2 years of business, but after that, you need to show you are in business.
There are 9 factors that the IRS looks at, but they all boil down to 4 specific characteristics. These are (1)Do you work in a businesslike manner, (2) Do you put in sufficient time and effort, (3) Do you have prior experience or have advisors who do and (4) Do you have a profit motive.
Got a question on what qualifies? Leave it here in the comments.
#2: Take an interest or hobby and turn it into the business.
If you have something you already spend time and money on, then make it formal and prove you have a business. You will pick up the expenses that you normally had doing your previous hobby activities as business deductions.
#3: Other business expenses such as a mail box, mail costs, software and the like.
There will be expenses that clearly occur as a result of you having a business. They wouldn’t exist if you didn’t have your online business. Make sure you keep track of those.
I recommend you have a separate business bank account just for your business and use the debit card associated with it for those expenses. Plus, take one of your credit cards and convert it to a business only account. Don’t run personal expenses on it and don’t run your business expenses on a personal card.
Your company will likely need some cash to get going. Loan lump sum amounts from your personal account to the business. Don’t pay expenses from your personal account. Make sure you pay with your business account or credit card.
#4: Computer Expense
Your computer is a business expense if you use it for business. That expense could also include your printer and notepad. If you bought those before you started your business, list the items and determine the current fair market value (FMV).
The business needs to reimburse you for the FMV of the items contributed. If the business doesn’t have the money, loan it the money from your personal funds and then have the business reimburse you.
This leaves an audit trail for tax time and in case the IRS or state taxing agencies ever ask.
#5: ISP Expense
Your Internet Service Provider (ISP) is a tax deduction. If it’s bundled with other services that are used primarily for personal use, you’ll need to allocate the monthly fee based on relative use.
#6: Cell phone & cell phone plan
In the past, a cell phone was considered “listed property” that had to be allocated between personal and business use. The IRS changed the rules on that a few years back so that you can now take a full write off for the cost of the phone and the cell phone plan.
Just like with the computer and other computing peripherals, use the fair market value and have the business reimburse you for the contribution.
#7: Pay your kids
In 2020, you can pay your child up to $12,400 with no tax to your child. It’s fully deductible for your business. If your business operates as a Sole Proprietorship (Schedule C) and your child is a minor, there is no Social Security tax due.
If you pay a dependent through your business, there are 3 things recommendations to follow:
(1) Have a written job description
(2) Pay a reasonable wage
(3) Have your dependent keep a time log
#8: Software expense
Software that is used in your business is tax deductible.
#9: Business meals expense
A business meal is currently deductible at 50%, although there has been talk of changing that to 100% deduction. Keep watch on that one!
There needs to be a business purpose for the meal and you need to keep track of the purpose and the proof you paid.
#10: Home Office
If you have a portion of your home that is used regularly and exclusively for business, you have a home office.
It is NOT an audit red flag. The IRS actually cleared that up back in 1994. I’m amazed at how many people keep perpetuating that myth.
The one challenge a beginning business has with the home office deduction is that a home office expense can’t increase a business loss or create a business loss if the deduction is taken. As long as you use the “long form” home office deduction where you calculate the deduction based on the actual business square footage times the indirect expenses. The quick form is $5/business square foot up to $1,500 for the year.
Want to get your online business up to a quick start! Join us at Sustainable Digital Empires as part of coaching.