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A Great Shelter From Taxes: Your Own Business!

If tax time equals sleepless nights for you, as you wonder what kind of bill you're going to be socked with this year, and how you will ever pay it, then you should know that there are ways to take chunks out of that bill before you even pull out your checkbook. Educate yourself about all of the tax deductions out there, and take advantage of every single one that applies to you. While things like homeownership and charitable donations make great tax deductions, the best tax relief going comes in the form of your own business. If you are self employed, then your business may be the key to making sure you don't have to turn too much money over to Uncle Sam every April, or better yet, may help you make sure Uncle Sam is writing a check to you instead.

When it comes to looking for things to deduct from your taxes, the trick is to find a way to make as many of your normal expenses as tax deductible as possible. That is why your own business makes such a great tax shelter. Almost every penny you spend can be considered a business expense. If you run a home based tutoring service, then everything from your pens and pencils to snacks for your students to the electricity you use can be written off of your tax bill. If you're a self-employed carpenter, then your van, your gas costs, your tools, your phone, and your home - even if you are a renter - are all tax deductible. The IRS only requires that your business expenses be "reasonable" and the courts have been extremely lenient in terming what is reasonable and what is not. One recent case involved a teacher who was allowed by the courts to deduct his golf expenses from his taxes, because he claimed golf was a business networking opportunity.

Of course, you can't just wake up one day and decide that you are a business owner. The process of setting up a business does not have to be difficult or costly, but there are a few requirements you will need to fulfill. First, you will need to file a so-called "DBA" form - "Doing Business As" - with your local courthouse. All this involves is filling out a form stating your name and address and your business name. For an extra layer of protect, file a 5213 form with the IRS; this form will prevent the IRS from challenging any of your business deductions for the first five years of the business.

The test the IRS uses to make sure your business is legitimate is to ask if you have a "profit motive." This does NOT mean you have to make a profit; you only have to demonstrate that you WANT to make a profit. This is what separates hobbies from tax-deductible businesses. Your intentions are determined by the way you approach your business - do you treat it like a profession and spend a consistent amount of time working on it? Note again that your business plan does even have to show a reasonable hope of making a profit anytime soon; as long as you are motivated by making a profit, then your expenses are tax deductible.

If these deductions sound too good to be true, you should know that claiming them requires a lot of work on your part. You must save and organize all of your receipts and keep meticulous records, in case you are ever audited. If you're serious about your business deductions, get a qualified financial advisor to oversee your tax preparations to make sure you are claiming everything you can and going about it correctly.