Home Based Business Your Ultimate Tax Shelter

Home Based Business Your Ultimate Tax Shelter

Home Based Business: Your Ultimate Tax Shelter
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.

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