Home Based Business: Your Ultimate Tax Shelter

Starting and operating your own home based business is the ultimate tax shelter. Although this article is written from a Canadian income tax perspective, the principles should be practical in other tax jurisdictions. 1. Non-deductible personal expenses All of us are costs we incur in everyday life. Either you rent an apartment or house or your own home. Utilities, insurance, rent, mortgage, property taxes, repairs and maintenance and operating costs are typical of your home. You probably have a vehicle that consume large amounts of cash.



Add to this, eating, entertainment, gifts, alcoholic beverages, stationery, telephone and many other expenses, and you have a significant cash outflow. In most cases, if employed, retired, investor, student, housewife or little of these costs are tax deductible for you. This means you should earn a substantial income, you pay income tax, and then use what is left to pay all your expenses. Some employees may be able to write-off part of their work-related expenses, if required by their contract of employment.



But even in this situation, the tax deductions are very limited. 2. Your Own Home Based Business Means Tax Deductions Now consider the situation where you decide to start your own home based business. Suddenly, many of your everyday expenses are now used for business purposes and are now tax deductible. If you use one quarter of your home exclusively for business use, you will be able to deduct (or write-off) one quarter of all related occupancy costs. These costs may include maintenance and repairs (that are not capital in nature), rent, mortgage, house or apartment insurance, power, heat, water and property taxes.



Besides spending your vehicle for business purposes are another tax write-off. If your car ninety percent for business purposes, you can deduct ninety percent on your car insurance, gas and oil, maintenance and repairs, car washing, the license and registration, auto club, loan interest (within certain limits), and other expenses on your income. You can also write-off one hundred percent of your business related parking. Allow capital Nance (CCA) on your vehicle is allowed for income tax depreciation is the accounting term for this deduction.



The Canadian government also allows as a deduction, fifty percent of your business related entertainment expenses. Also tax deductible business related telephone expenses, Internet access, office supplies, travel, books, memberships, and many other expenses. 3. Income Splitting with Your Home Based Business If you have a highly paid job, you pay higher taxes because the tax increase as your income does. With your own business, you can pay reasonable wages to your partner and children. This way you can legally divert income taxed at your higher rate for your family in a lower tax bracket.



Tax Savings This technique is called income splitting. It is a good reason why your own home based business is the ultimate tax shelter. 4. Even a Part-Time Home Based Business even if you work a full-time job, running a part-time business can be advantageous. Of course, you actually run a real, moneymaking business. Any attempts to write unprofitable hobbies off will not end with the tax authorities. If you earned one thousand U.S. dollars during the eight years of your part-time business and had eight one thousand U.



S. dollars deduction in the car, home office expenses, entertainment expenses, office supplies, and other business expenses, you would net operating income of nil. You would pay no tax on this additional income. Don `t miss this important point! Although these tax deductions are actual, legitimate business expenses, these are expenditures you would probably have made, or you have a business or not. Thus, by rearranging your affairs to start and operate based on a home business, you have been able to convert non-deductible personal expenditures into legally deductible business expenses.



You have successfully sheltered your income from taxes and your income shared with relatives in lower tax brackets. Yes, indeed, your home based business, your ultimate tax shelter.