Starting and operating your own home based business is
the ultimate tax shelter.

Although this article has been written from a Canadian
income tax perspective, the principles should be
practical in other tax jurisdictions.

1. Non-Deductible Personal Living Expenses

All of us have expenses that we incur in everyday
living.

Either you rent an apartment or house or you own your
residence. Utilities, insurance, rent, mortgage
interest, property taxes, and maintenance and repairs
are typical costs of operating your home.

Likely, you have a vehicle which also consumes large
amounts of cash.

Add to this, dining out, entertainment, gifts,
alcoholic beverages, office supplies, telephone and
many other expenditures, and you have a significant
cash outflow.

In most cases, as an employee, retired person,
investor, student, or homemaker, few of these
expenses are tax-deductible to you.

This means that you must earn a considerable income,
pay your income taxes first, and then use what is
left to pay all your expenses.

Some employees may be able to write-off some of
their employment related expenses, if such are
required by their contract of employment. However,
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 being
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
expenses may include maintenance and repairs (that are
not capital in nature), rent, mortgage interest, house
or apartment insurance, power, heat, water, and
property taxes.

As well, your vehicle expenses used for business
purposes are another tax write-off. If you use your
car ninety percent for business purposes, you can
deduct ninety percent of your vehicle insurance, gas
and oil, maintenance and repairs, car washes, license
and registration, auto club, loan interest (within
certain limits), and other costs from your income.
You may also write-off one hundred percent of your
business related parking. Capital Cost Allownance
(C.C.A.) on your vehicle is also allowed for income tax
purposes; depreciation is the accounting term for this
tax deduction.

The Canadian government also allows as a deduction,
fifty percent of your business related entertainment
expenses.

Also tax-deductible are business related telephone
expenses, Internet access, office supplies, travel,
books, memberships, and a host of other expenditures.

3. Income Splitting with Your Home Based Business

If you have a high paying job, you will pay higher
taxes because the rates of tax increase as your income
does.

With your own business, you can pay reasonable wages to
your spouse and children. In this way, you can legally
divert income taxed at your higher rate to your family
members that are in a lower tax bracket.

This tax saving technique is called income splitting.
It is another good reason why your own home based
business is the ultimate tax shelter.

4. Even a Part-Time Home Based Business Works

Even if you have a full-time job, running a part-time
business can be advantageous.

Of course, you must actually run a real, moneymaking
business. Any attempts to write unprofitable hobbies
off will ultimately fail with the taxation authorities.

If you earned eight thousand dollars during the year
from your part-time business and were able to deduct
eight thousand dollars in car expenses, home office
expenses, entertainment costs, office supplies, and
other business related expenditures, you would have a
net business 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
anyway, whether you had a business or not.

Thus, by rearranging your affairs to start and operate
a home based business, you have been able to convert
non-deductible personal expenditures into legally
deductible business expenses. You have successfully
sheltered your income from tax and have split your
income with family members in lower tax brackets.

Yes, indeed, your home based business has become
your ultimate tax shelter.

RESOURCE BOX:

J. Stephen Pope, President of Pope Consulting Inc.,
http://www.popeconsultinginc.com/ has been helping
clients to earn maximum business profits for over
twenty-five years.

For valuable Work at Home Small Business Ideas,
visit: http://www.yenommarketinginc.com/

One way to maximize your business profits is by reducing your taxes.
Frequently, income and other taxes could be lowered significantly if
only the taxpayer were willing to plan ahead. By taking some simple
steps to rearrange your affairs, you could save a fortune!

1. Are You Splitting Your Business Income?

You may pay reasonable salaries to spouse or children through your
incorporated or unincorporated business. If you are not doing so,
you may be missing out on some real tax savings.

In the Canadian Federal Budget of February 16, 1999, measures were
introduced to discourage income splitting with minor children through
family trusts. However, these measures do not apply to paying
reasonable wages to family members. Thus, this may be one of the
last ways of legally splitting income left for the small business
person with minor children.

Obviously, the amounts paid must bear some relationship to the work
performed. Of course, all required payroll taxes should be remitted
and proper records need to be maintained.

Why not rearrange your affairs so that family members with little or
no income can perform duties for and be paid by your business? Then,
they can contribute out of their own income towards the operation of
the household. In this way, little or no tax will be paid by your
dependants and you will have successfully shifted taxable income out
of your hands.

2. Should You Register For The Goods And Services Tax?

Even if your business grosses less than $30,000.00 per year in taxable
sales, you may still benefit by registering your business to collect
the Goods and Services Tax (G.S.T.). If you are not doing so, you
may be missing out on some real tax savings.

For example, you will be paying G.S.T. on many of your business
expenses. If not registered for G.S.T., you must absorb this cost.
If registered, you may deduct the G.S.T. paid on such business expenses
(input tax credits) from the tax collected. Many business persons
expect to pay G.S.T. and it doesn`t really cost them anything since they
deduct such amounts as input tax credits from the G.S.T. they collect
from their customers.

In some cases, the quick method of calculating G.S.T. may actually
allow you to retain more of the G.S.T. collected than you would have
just claiming the G.S.T. actually paid by you.

A factor to consider also: If you are not registered for G.S.T.
in Canada, you are telling your clients that you do under $30,000.00
per year in taxable sales or that you cheat. Is this the image you
want your clients to have?

3. Could You Benefit From Incorporating Your Business?

Although incorporating your business may result in increased
accounting and legal fees (for setup, extra tax returns, and annual
minutes), the advantages of incorporation may justify this added
expense. Not only will you enjoy limited liability by incorporating,
but you may reap significant tax savings as well.

Corporations are often subject to lower tax rates on small business
income. In Canada, sales of shares of qualifying small business
corporations can obtain a lifetime $500,000.00 capital gains
exemption. Certain tax incentives and government programs are only
available to incorporated entities. Additionally, corporations can
be used for income-splitting and estate, retirement, and succession
planning objectives.

4. Do You Engage in Tax Planning Year-Round?

Some people only worry about their taxes during tax season. However,
you will save a fortune in taxes, legally, if you make tax planning
your year-round concern.

Can you make some changes to turn your hobby into a moneymaking
business? Can you use that extra room in your house as a home office for
your business? Can you arrange to use your car more for business
purposes and have you documented your business use mileage? Can you
arrange for more of your entertainment expenses to be business related
and have you listed the business purpose on the back of each receipt?

Do you make business and personal purchases, investments, and other
expenditures with tax savings in mind. Do you document your expenses
well so that you they would survive a tax audit? Whenever you are faced
with a business or personal financial decision, do you consider the tax
consequences?

Make year-round tax planning part of your business management mindset
and, thus, enjoy maximum tax savings. Yes, by rearranging your affairs
to account for tax implications, you will save a fortune in taxes.

RESOURCE BOX

J. Stephen Pope, President of Pope Consulting Inc.,
http://www.popeconsultinginc.com/ has been helping
clients to earn maximum business profits for over twenty-five years.

For valuable Work at Home Small Business Ideas, visit:
http://www.yenommarketinginc.com/