The immediate tax benefits and the long-term planning opportunities available to all business owners are the most logical reasons for opening a business. There must always be a profit motive, meaning that you can’t write off “Hobby expenses”. You can, however, turn a hobby into a business. There are two simple steps to opening the door to your tax benefits:
1: Make a decision to turn your “Hobby”, Idea, Passion, Etc.. into a for profit business.
2: Take business action and document it.
Tax Write Offs – What you can and can’t deduct
Business vs. Personal – This is very simple if you stick to the concept that you can not write off personal expenses. The obvious items are groceries, clothing, pets, kids day care, vacations, sporting events, etc. Anything that you do that is not directly tied to your business is not a legal business deduction. “Not directly connected to your business” opens the door to some exceptions. Making an event “directly connected to your business” can be easy to document and substantiate. Here are a few that come to mind:
- A business owner leased a warehouse that was in a high crime area. He bought a watchdog to guard the premises. The food and care of the dog were a business deduction.
- Continuing Education Credits given on cruises.
- Scouting out rental properties in the Bahamas, if your in that business.
Combined Business & Personal Expenses – There are unavoidable situations where a percentage belongs to business and a percentage is personal. Business use of your car for example. You have to “carve out” the personal use percentage. How you do that depends on your bookkeeping system and how your accountant wants to prepare your tax return. You can go on a business trip and bring the family but you can’t deduct the cost of bringing them along. An easy way to handle this is to pay for the trip with a personal credit card and have the business pay the business portion only. This make the accounting easier and raises less red flags.
Converting Personal Property to Business Property – PUB 551 Not many people know that you can contribute personal assets to your business and take a business deduction for the fair market value of the asset. If an owner contributes money to the business it’s considered either equity or a loan to the business. It’s the same with a piece of equipment, tools, vehicles, etc.. On top of that the new tax law allows an immediate tax deduction for used assets. In the past you would have to take depreciation over x amount of years. Now, if you have a truck worth $20,000 and start a moving business you have a $20,000 write off!
Asset Protection – Corporations can be used to both protect your personal assets and shelter your personal assets. Shareholders are not liable for the operations or the corporate debt, unless personally guaranteed. Corporations can also be used to protect personal assets. For instance, transferring ownership of a yacht to a business in return for a minority interest in the corporation. If subsequent creditors were able to obtain your stock it would be a minority interest with little or no value. Note the word subsequent. It could be deemed fraudulent if assets were transferred for the purpose of avoiding creditors. There are legal transfers and illegal transfers. Consider speaking to a trusts and estates attorney if you plan on implementing this kind of strategy.
Retirement Planning – Business owners have a serious upper hand when it comes to putting money away for retirement. For 2018 a business owner can put up to $55,000 away with a SEP IRA. Retirement Plans For Self Employed People.
Business Use of Your Home – I’ve had a change of direction on this one. At one time business use of a home was a red flag. I had a friend sell his home at a loss but we had a gain on 10% of the sale because it was business property. In today’s economy most self employed people do a good portion of their business from home and the IRS has relaxed their rules on what qualifies as business use. There are still strict rules but they are much easier to follow.