One of the benefits of having a business is that you’ll pay less tax. In fact if you make $50,000 in business versus $50,000 in a job, you’ll pay, on average, $5,000 less in tax. Businesses pay less tax.
That’s because of business deductions. If you have an expense that can be shown to be ordinary and necessary to the production of income, it will be a deduction. So, you may have things in your house right now that could be deductible if you had a business. That includes things like your computer, cell phone, printer, home office, desk, desk chair and other business type equipment or furniture. You also can probably take a deduction for part of your auto use, travel and meals. With a business, you have more deductions and often they are things you’re already spending money on.
But there’s a downside to all of these deductions. You have lowered your income. For tax purposes, that’s great. But, what if you’re looking for a loan. This is the problem that self-employed or business owners regularly run into.
There are some items that are tax deductions that do not subtract from regular income, so you have lower taxable income than you have income for calculating your loan. Some of those type of expenses include depreciation, home office, net operating loss (in some circumstances) and business use of your car. The trick here, though, is to make sure you’re working with a loan broker who is experienced with the intricacies of calculating income for loan purposes.