Month: January 2018

Tax Benefit of Owning a Business

Owning a Side Business can save you hundreds of dollars every year.

You don’t need to invest hundreds of thousands of dollars to open a business. It doesn’t need to be a full-time business to take advantage of the tax savings. It can be a part-time or side business that may grow to a point where it becomes full-time.

Most people don’t think about owning a business unless it will make them a lot of money. Making a profit is extremely important when starting a business because nobody starts a business with the idea to lose money. It may take two to three years to show a profit and start replacing your salary. But what if you could save money each year with your business while it is making very little profit or no money at all?

There are tax savings involved in running a business that many do not consider. Being an employee is the worst way to save on taxes because Uncle Sam takes a large portion out of your paycheck before you get anything. With a business, you can pay for many things using pre-tax dollars, which can save you hundreds of dollars every year. So, while on paper, your business is not making money, you are getting the savings of buying goods with money that is not being taxed.

Some of the most common deductions include:

  • Home Office Deductions
  • Business Use of Vehicle
  • Equipment
  • Business Trips
  • Health Insurance

Put Up, or Shut Up

What you really what to see are some numbers. According to the Bureau of Labor Statistics (BLS), the average income for a family 2016 was $74,664 and the most common tax bracket is 15%. This means you are paying $11,199.60 to Uncle Sam before you take home $63,363.40. The BLS estimate that the average family has $57,311 in expenditures every year. It is not surprising that the average family is struggling to get by.

Let’s see how much an average American can save by owning a business. We will look some of the expense costs (per the BLS) for the average American family and look at just a few common deductions you could see by owning a business; Auto Mileage, Home Office, Travel, and Equipment.

Transportation

According to the BLS, the average American spends $9,049 on Transportation and drives 13,474 miles per year. Let’s assume you are using 20% of your miles for business purposes. This would allow you to deduct 2,695 miles and with the 2017 IRS mileage deduction of 53.5 cents per mile, you would have a $1,442 tax deduction.

Housing

According to the BLS, the annual expense for Housing is $18,186. By working out of your home, you are able to take advantage of many tax deductions. If you were to assign 20% of your home to dedicated business use, your deduction would be $3,637.20.

What about utilities such as water, gas, electric and a dedicated phone line? The average American will spend about $2,400 on utilities. We will assume a 20% deduction which is a $480 savings per year.

Food

The average American family spends $3,008 on dining out. My wife and I are always discussing our business whenever we eat out. As a result, we expense some of our meals every month. We will assume the average American can expense 20% of their meals. The IRS only allows you to expense 50% for meals and entertainment, this would equal at 10% deduction equal to $300.80.

Travel

Financial experts suggest that the average family spend about 5% of their total income on travel, or $3,733.20. You are not able to deduct the expense for travel that is purely for pleasure, but with proper planning, you can make the trip business related. We don’t have a breakdown of the $3,733.20 (airfare, lodging, food), so we will assume that 70% is deductible. This would give the average American a total deduction of $2,613.24.

Equipment

Thanks to the new tax laws, the Section 179 provision is continued and has increased its threshold. Computer equipment and furnishings can be expensed 100%. If you need a new laptop, printer or desk, you can deduct 100% of that cost the year in which you put it in use. If we were to assume that the average American spends $1,900 on equipment and 20% is used for business, the total deduction would be $380.

How much can I save?

There are many more areas in which a business can save you money and my assumptions are on the conservative side, but if you total up just a few examples we have here:

$1,442.00 + $3,637.20 + $480 + $300.80 + $380 = $6,240.00

Based on an average income of $74,664 in the 15% tax bracket, you would be saving $1,026 per year even if your business is not making any money. Even if the business is part-time.

You will need to document every expense carefully and you should work with an accountant. There are easy to use software programs, such as Quickbooks, that make this process simple. Oh yeah, you can deduct the cost of your Quickbooks software.

Finding a business to suit your lifestyle and budget is not as hard as you think. This is one reason why you should use a Franchise Broker because they have more information than you can find on the Internet.