Over the last few days we’ve discussed ways to increase your personal ROI and how to turn your business’s lazy assets into multiple streams of passive income.
Today, I want to talk about some of the tax issues and consideration.
Unfortunately, the term ‘passive income’ has come to mean something in the general vocabulary that is different than what the IRS says it means.
For example, there is one guy who touts you should be able to spend 10 hours per month on an activity or it’s not passive. Okay, fair enough. But if you do spend 10 hours per month on an activity and are very public in what you say, you can count on a letter from the IRS.
That’s because an activity that only takes you 120 hours per year or so is more like an investment, not a business. Any losses you get aren’t deductible. And if you’re building a passive business, you’ll soon discover that you have to invest one thing or the other: time or money. That means if you’re not putting time in it, you’ll have to put money – to build systems, capital, training and hire others. And with bad tax planning, you might not even get a deduction for those expenses.
Beware of Tax Advice From People Who Don’t Know What They Are Talking About!
The best tax advisors will have (1) experience, (2) education and (3) Point of View that matches what you want to learn. Look for advisors who have clients at a place with business and investments similar to where you want to be.
What Passive Income Really Is
Now let’s talk about what passive income really is. Passive income is income that comes with you having to work for it. BUT that doesn’t mean you don’t spend hours, so that you lose all the tax benefits.
No, in this case, there is a subtle difference. You spend time managing the investment, performing administrative and managerial tasks. If you have a real estate investment, you don’t fix the roof. You hire the property management company that hires the repair guys. If you have a business, you don’t work in the business, you don’t even manage the guys who work in the business. You treat the business like an investment – watching stats, weekly and monthly
If you can set this up right, you can invest so that you pay NO taxes. Zip. Zero. Nada.
That’s because with a truly passive business, your pension plan can invest in it. And that means the income flows through to be taxed later (tax deferred) or taxed never (tax free).
Business and Taxes
What you don’t know can hurt you. What you do learn, from true advisors, can make business easier, more fun and even better, more profitable.
Want to get more tax and business tricks designed to put more money in your pocket? Then get your hands on Smart Business, Stupid Business quick!