We're paying a boat load in taxes, need tips

[cptacek]

Re: We're paying a boat load in taxes, need tips

Jim, its my dream to be self-employed but I'm too chicken and lazy to take the initiative but tell me how that helps lowering taxes ? Say for example I start a computer consulting business for example, the most I could write off would be a few computers and office supplies, then I'll have to pay SE tax and income tax etc ?

You can write off the computers, office supplies, mileage or actual expenses on your vehicle for business purposes. If you designate an office in your house that is specifically for business purposes, you can write off a portion of your rent as well as a portion of the electricity. If you have a second phone, you can deduct that, and any long distance calls made for the business can be written off. You have to cater to customers and make business contacts, so meals and travel related to that can be written off.

I don't know the limit for married folk, but for single people the most you have to pay SE taxes on (last year) is $90,000. I'm guessing (!) that for married people that limit is double that? So, if you both are making more than that at your jobs, less contributions to your 401(k), any profit you make on your business won't have SE taxes. You do have to pay medicade though, ~2%. You would pay income tax on the profit, not on the money coming in. If you have enough deductions, you might not make a profit.

Of course, you eventally have to make a profit...if it is just a hobby, you weren't qualified for the deductions and so have to pay the taxes.

[cicy33]

Re: We're paying a boat load in taxes, need tips

OK that's what I was talking about earlier too but then Cicy said it in a way that it made sense After running the numbers you're right too.

So say I owe $3000 to the IRS, I take that $3000 and spend it on equipment for business so I can get a tax deduction:

$3000 x .25 = $750 (tax deduction)
Owe IRS $3000 - $750 = $2250
Final bill $2250 + $3000 (business expense) = $5250

now if you needed that $3k worth of equipment then great which is what cicy's doing with her business but just for a tax deduction the answer is no.

OK so I think we're all kind of saying the same thing with a little twist

actually more like this:

$1000 x .25 (or whatever it is, I don't know but for sake of argument go with this number) = $250. ** I have checked on this and you are allowed to take the full deduction of the equipment but can elect to depreciate see this link: http://www.irs.gov/publications/p587/ar02.html#d0e2341 (if does not load go to the irs.gov and type in business deductions.

$700 (cell) x 100% = $700

Mileage: say 4,000 X 37.5 here = $1500 (we actually have about $14K)

Misc supplies purchased ex paper, pens, paper clips $500 x 100% = $500

I don't know the rate of deduction on rent or utilities & insurance but we will say $1000 x 100% = $1000. I am already arriving at the percentage of the house with the $1000. so that is why I have it at 100%. Actual percentage is the percentage of the house that you use for your business, ex 10% or 20%. I use 10% I think.

So now we have in deductions $3,950. Remember, the cell is a normal expense that you have anyway, but now it is a business expense 100% deductible. Fuel is a fairly common expense. The rent and utilities are there anyway and now become a deduction. The only items that are depreciated are the equipment that are over $1000 each. Like a truck or a trailer or something. We had to buy a new computer this year and spent about $500, 100% fully deductible. I had to buy it anyway, the other one broke.
$250 equipment over $1000
$700 cell phone
$1500 Mileage reimbursement
$500 misc supplies
$1000 House and utilites and insurance (if you own your own home your homeowners is partially deductible)

So you have spent in extra cash a total of $2200 in "extras" that maybe you would have purchased and maybe not, (I included cell but not mileage or house) but you have $3950 to deduct
so you will probably not even deduct everything cuz you are in the hole. And remember you are not spending the money all at once you are doing this throughout the year. How many times have you spent money on pens, paper and never thought twice? DEDUCTION!!!!

[sweeps]

Re: We're paying a boat load in taxes, need tips

Remember, the cell is a normal expense that you have anyway, but now it is a business expense 100% deductible. Fuel is a fairly common expense. The rent and utilities are there anyway and now become a deduction. The only items that are depreciated are the equipment that are over $1000 each. Like a truck or a trailer or something. We had to buy a new computer this year and spent about $500, 100% fully deductible. I had to buy it anyway, the other one broke.

And remember you are not spending the money all at once you are doing this throughout the year. How many times have you spent money on pens, paper and never thought twice? DEDUCTION!!!!

Hold up. You can't deduct things just because you run a business. If you use your cell phone half the time on personal calls or you use the computer half the time on non-business activities, you cannot claim their full value as a deduction.

[cicy33]

Re: We're paying a boat load in taxes, need tips

That is true, but my husband's cell is for business purposes, mine is for personal. since both are used for both partially it is easier just to deduct one totally. For the average person, it depends. If you use the cell phone for more than I think it is 60% of business then it wholly deductible, you cannot control who calls you.

[jmjj215]

Re: We're paying a boat load in taxes, need tips

That is true, but my husband's cell is for business purposes, mine is for personal. since both are used for both partially it is easier just to deduct one totally. For the average person, it depends. If you use the cell phone for more than I think it is 60% of business then it wholly deductible, you cannot control who calls you.

I don't buy that unless you have a source. There's no way the IRS would let that fly.

With the $3,950 to deduct in cicy's example, that gives you an actual cash savings of $988 (assuming you're in a 25% tax bracket, could be more, could be less).

You spent, in cicy's example, $2,200 of cash, and received back $988 in cash from the government. Remember that the mileage, although not a cash expenditure, is an actual cost that will eventually be paid for with cash through wear and tear on the vehicle that would not have happened had you not been running a business.

So, if you were already going to spend the $2,200 and it makes business sense to do so, it's great that you save $988 in taxes by spending the $2,200.

[cicy33]

Re: We're paying a boat load in taxes, need tips

I don't buy that unless you have a source. There's no way the IRS would let that fly.

With the $3,950 to deduct in cicy's example, that gives you an actual cash savings of $988 (assuming you're in a 25% tax bracket, could be more, could be less).

You spent, in cicy's example, $2,200 of cash, and received back $988 in cash from the government. Remember that the mileage, although not a cash expenditure, is an actual cost that will eventually be paid for with cash through wear and tear on the vehicle that would not have happened had you not been running a business.

So, if you were already going to spend the $2,200 and it makes business sense to do so, it's great that you save $988 in taxes by spending the $2,200.

I personally bought the computer for business, doesn't mean that I don't use it for personal but I bought it for business so I deducted it. think of it also this way, you bought a uniform for work, cost $100. you wore that uniform after work each day for 2 hours before changed, you ate in it, you relaxed in it, you watched tv, et. do you deduct the whole cost? YES. but if you wanted to be the perfect little tax payer and I cannot believe anyone is not looking for a way to get out of taxes on this board then you could only deduct a % of it. Since you didn't take it off the minute you walked in the door. Yes, the fuel would be extra but again. you are going to pay the $3000 NO MATTER WHAT. if you paid part of that in gas for your business then the gov didn't get it. you still have to pay it. and some of the deductions that I mentioned are normal expenses, cell phone, utilities, portion of rent. the misc equipment we buy and don't think about, you learn to think about how to do things more effeciently when you run a business. so you buy pens for the business and you use one to write a check so what? and the $1000 expense was if you had to purchase equipment that was expensive. if you bought a computer for $500 and a printer for $100 you could deduct all of it. 100% and have something to show for it besides a lovely receipt of paper. The $1000 was not in stone, just an example. If you start a small home based business you don't need a ton of equipment. a phone, computer, printer, internet connection are all you need. If you drive to the store to buy these things, you incur Mileage. Make it part of your trip and keep a little record of your mileage part for business you would be amazed how fast that runs up. Generally you keep a little notebook in your vehicle. Since my dh truck is primarily for business and mine is for personal we just write down mileage at beginning and end and mine has a little book.

This is a copied direct quote form the irs.gov page for business expense deduction. also note above that I said you can either deduct or depreciate, your choice. and if you click on the above link then it should take to this page or close to it. More-than-50%-use test. If you bought listed property and placed it in service during the year, you must use it more than 50% for business (including work as an employee) to claim a section 179 deduction or an accelerated depreciation deduction. Keep in mind I also said i think. I can be wrong but since we do file business tax every year with a certified accountant I don't think we have broken any laws.

[cicy33]

Re: We're paying a boat load in taxes, need tips

I think what people are missing is that I never said go out and start a ten thousand dollar business, I said, start a small home business. Low outgoing expense, good deductions that are already a part of your normal life, and lower your taxable income. Even if you only deduct part of your cell phone that is a new deduction. your utilities, your rent or mortgage, insurance for home owners, all deductions of money you already pay. Even if you already have a computer just set aside a small area for business and viola! Deductions are born. and by doing it this way you will earn

Cell $350 (using 50%)
Utilities: $200 (10%)
Rent or mortgage: $500 (guessing)
Insurance: $200 (10%)

that is already over a $1000 with no out of pocket money

[sweeps]

Re: We're paying a boat load in taxes, need tips

cicy, the problem is the IRS doesn't mess around. You could go a long time, maybe forever, without getting audited. But if and when you do and you're not following the rules -- to the letter -- you could be in a world of hurt.

I also read the same thing... if you use your cell phone more than 50% for business purposes you can deduct it. But note that is the equipment only. You still need to keep records on business vs. personal calls. Also the cell phone cannot be your primary phone. People who disconnect their land line with the plan of using their business cell phone as their "home phone" and getting a deduction out of it are SOL.

One more note about running an office at home. Most homeowner insurance policies do not cover loss that can be traced to the home office. If, for example, a printer caught on fire and burned the house down, the insurance company would have a strong case to reject the claim. Especially since part of the home and the printer itself was claimed for business tax purposes.

[cicy33]

Re: We're paying a boat load in taxes, need tips

I don't break any rules. I am actually very careful about that. We just don't make a lot of money to owe a ton of taxes. And I am not suggesting anyone break rules. But people start businesses all the time to help save on their taxes as well as earn extra money. That is not a new idea. I haven't had any damage yet, so don't know. When my computer broke I just bought a new one. so will have to see when that time comes. We claim part of our home because I do my dh business out of it. We have two cell phones, mine is for personal primarily. Doesn 't mean he doesn't get calls for personal but it is meant for his job primarily. and I use mine for his business frequently as well, but we just deduct one so that it is simple. it would probably be more than one phone percentage if we actually wrote down every time I had to call a company or a home owner or a supply company. I do it so often it drives me crazy sometimes. We don't have a land line, haven't had for years, but that is not because of the business. We are thinking of having one put back in for fax purposes. Right now I fax stuff from the bank but that is so inconvenient. Remember this was strictly a suggestion to help lower their taxable income, not a push to do the small business. No matter what anyone says, starting a business no matter how small is a pain.

[lucasrd]

Re: We're paying a boat load in taxes, need tips

Maybe look into max-funding a Universal Life Insurance policy...cash value accumulates tax free..money can be taken out tax free...

My wife and I had to pay in about 21K in taxes this year...OUCH...we hired a financial planner.

If you have your own business (even on the site) you can open an Individual K or a SEP IRA...that can help...

[sweeps]

Re: We're paying a boat load in taxes, need tips

Yeah, financial planners love when their clients open a universal life policy.

[lucasrd]

Re: We're paying a boat load in taxes, need tips

Yeah, I know they do (we didn't open the policy) but the cash value does compound tax-free and you can withdraw the money tax free...plus you get $1,000,000 life insurance policy...

Just a thought if you have extra cash...

We ended up purchasing term life insurance and investing the rest...heck, if I have to pay taxes on my gains, atleast there are gains to pay taxes on!!!!

[jmjj215]

Re: We're paying a boat load in taxes, need tips

I just want to reiterate a hard and fast rule of tax planning that I heard straight from my professor's mouth:

If you were going to make the purchase anyway, you should look for every possible way to deduct it within the rules. You should never make purchase decisions purely for tax reasons.

That's all I'm trying to say.

[lrjohnson]

Re: We're paying a boat load in taxes, need tips

cicy33

I cannot believe anyone is not looking for a way to get out of taxes on this board

I am not looking for a way to get out of taxes. Believe it. I do not like the assumption that I would try. I may be one of the few who pays the use tax in California-basically anything we buy from outside the state that wasn't taxed, we are supposed to pay the tax on at tax time. I pay that tax, even though the odds of someone coming to my house and adding up my out of state online purchases for the year is slim. I have never objected to paying taxes. I support taxes that won't directly benefit me: I know no children at all, but I have voted to increase my own taxes for children's education. If I feel my tax money is being spent poorly, I use other avenues to express my frustration.

[sweeps]

Re: We're paying a boat load in taxes, need tips

Nothing wrong with tax avoidance. Just as long as it doesn't become tax evasion.