If You Don't Have a Home-Based Business, Start One Today! Top of Page

Sandy Botkin CPA. Esq. / Copyright 2001, all rights reserved

The last decade may have been a decade of tremendous corporate profits and economic growth, but for the vast majority of North Americans, the 90's were a dismal, uphill climb. And many economists believe that this new millennium won't be getting better any time soon.

Why?

Changing business and government attitudes are the reason. There has seemingly been more anti-business legislation in the last decade than in any other this century. Stronger employment and labor laws, the Age Discrimination in Employment Act, the Comprehensive Omnibus Budget Reconciliation Act (COBRA, which includes mandating health insurance for workers for a period of time after they leave employment), safety laws, much tougher laws for discharging workers, more liabilities for lawsuits, Family Leave Act, Americans with Disabilities Act (which is creating immense numbers of lawsuits), along with higher minimum wages and fringe benefits.

Just reading this list is exhausting.

While these acts have beneficial and protective aspects, they have also encouraged businesses to move their facilities. That "sucking sound" popularized by Ross Perot is not just down to Mexico, but elsewhere as well. The result has been a dramatic loss of heavy industry in the U.S.

The young and the middle-aged alike are realizing that their dream of "having a job with a company forever" is an illusion. Companies have been downsizing, rightsizing, and capsizing for some time now, and they continue to do so - more now than ever before. Even the federal and state governments are getting into the act with layoffs and attrition of jobs.

In addition to all this uncertainty and mutual lack of loyalty between companies and employees, even the workers who do keep their jobs have no guarantee of promotions due to the shrinking number of management positions. These circumstances aggravate the already tryingly long commutes in rush hour traffic and increasingly typical frustrated boss-spelled backwards, that double S-O-B.

Finally, if all this isn't bad enough, under recent tax laws employees are shafted more than ever with limits and thresholds for their employee deductions and higher social security tax limits. This results in more couples working than ever before and, on many occasions, working more than one job. It is now almost impossible to have only one job in the family and make ends meet! Today, many households need three incomes just to survive.

Sadly, even having more than one job does not produce any major positive effect on most people's bank accounts. Why? Because of tax laws. This was well illustrated in 1994 by Jane Bryant Quinn in her Woman's Day article on "How to Live on One Salary."

Where The Money Goes

Ms. Quinn's example assumed that a man was earning $40,000 per year. His wife (we will call her Lori) wasn't working. They had more month than money. (Sound familiar?) Lori subsequently got an administrative job for $15,000 per year. You would think this would improve the family's financial situation, but when Ms. Quinn examined the economics of getting this extra income, the results were startling!

Lori had to pay federal and state taxes on her new income. Since they filed jointly, the family's combined income was what established their tax bracket. She paid $4,500 in new taxes, most of which was non-deductible, for federal and state income tax.

Lori had social security withheld from her paycheck at the rate of 7.65 percent, which amounted to an additional nondeductible amount of $1,148 being extracted from her salary. She also had to commute to work 10 miles a day round trip, which is probably conservative for most people. This resulted (in 1995) in nondeductible commuting costs of $696.

Lori also had some child care expenses, which give a partial tax credit. Ms. Quinn figured that the amount spent over and beyond the tax credit was $4,250 per year.

Lori also ate out each day with colleagues, spending an average of $5 per day, five days a week. This results in a nondeductible expense of $1,250 per year. ( I would love to know where she ate for only $5!)

Now that Lori has a job, she has to have professional clothing, this means a hefty dry cleaning bill. Ms. Quinn assumed that Lori's increased expenses here amounted to an extra $1,000 per year, nondeductible, of course.

Finally, with both spouses working, Lori wasn't in the mood to cook dinner every night. They bought more convenience foods and ate out more frequently. This resulted in increased food costs of a nondeductible $1,000 per year in minimum.

Add it all up and Lori's take home pay was a paltry $1,156 a year, for which she had to put up with a daily commute, an unpleasant boss, and corporate hassles.

No wonder more and more people are starting home-based businesses. In fact, there are currently an estimated 30 million people working from their homes. This number is expected to more than triple, to 97 million, by the year 2000, and to keep on growing. This has become and will continue to be one of the greatest mass movements in the U.S.

Why a Home-Based Business Makes So Much "Cents"

There are many reasons why so many people are favoring home-based over traditional business.

There is no commute (unless you have a really big home), no boss, little if any chance of lawsuits, much lower overhead, no employees, (or few), and far fewer government restrictions. In fact, many of the laws previously cited don't apply to small firms with few or no employees. It is for these reasons, according to Entrepreneur magazine, that 95 percent of home-based businesses succeed in their first year and achieve an average income of $50,250 per year with many earning much more.

There are really two sets of tax laws in this country. One is for employees, and it allows deductions for individual retirement accounts, 401(k)s (if you have one set up by your company), interest and property taxes on your home (which some in Congress want to do away with ), and charity. Then there are the laws for home-based business people who conduct their business either full-time or part-time. They can deduct, with proper documentation ,their house, their spouse, and even children (by hiring them), their business vacations, their cars, and their food with colleagues. They can also set up a pension plan that makes any government plan seem paltry by comparison.

For Lori - and for you - the meaning of all this is simple:

Lori earned $15,000 in salary as an employee, but took home only $1,156. She could have netted the entire $15,000 had she earned it in a home-based business!

This is an increase of almost 13 times her take-home pay as an employee.

Notice that Lori is not spending dramatically more money than she is currently spending. She would eat out anyway, go on trips and drive her car the same as before. By having a home-based business, however, many of their expenses become deductible. This concept is known as "redirecting expenses." With a legitimate home-based business, she can now deduct some of the expenses that she is incurring anyway.

Renegade Strategy: If you don't have a home-based business, start one!

In addition to all the benefits mentioned above, Congress will subsidize you while you are growing your home-based business. If your home-based business produces a tax loss in the first year or so, you can use that tax loss against any other income you have. It can be used against wages earned as an employee, dividends, pensions, or interest income-or you can use the loss against your spouse's earnings if you file a joint return.

If the tax loss exceeds all your income for this year, no problem. You can carry back the loss two years and get a refund from the IRS for up to the last two years of income taxes paid, or you can carry over the loss twenty years. You read it right: You can offset up to 20 years of income!

Here's an example:

Renegade Strategy: Get LUCK - Labor Under Correct Knowledge.

Can You Succeed In a Home-Based Business?

Research has constantly shown that it is rarely the business that determines success or failure. It is usually the business owner. Why does one person succeed and another fail at the same business?

Two words - Knowledge and Action.

Some people want the benefits of having their own business, but they don't take action. The result is business failure.

Then there are the people who are always working. They take action but still fail. The reason is that they are not taking the correct actions, the knowledgeable actions, that will bring the desired results. Again, business failure.

It's like drilling for oil. If you set up a drilling rig in your back yard, it is going to fail at producing oil unless your back yard is in Texas or Alaska. The same rig in a good field will produce a gusher, because it was placed where oil was known to exist.

The point is that most people who get excited about starting their own home-based business do so without all the necessary knowledge. Consequently, many people quit before they acquire, through experience, the knowledge they need, without realizing that they are getting substantial tax breaks. This leads to another strategy....

Renegade Strategy: Learn to duplicate the success of others.

Duplicating the strategy of others is much quicker and more effective than going to the school of hard knocks.

It is also known as modeling, which is well illustrated by the way The McDonalds Corporation blazed a trail to success that many have since followed.

In the early 1950's McDonald's and other start-up companies discovered that they could grow many times faster than the conventional firms through franchising. Instead of the company investing millions of dollars to build new stores, they let independent franchises do it for them.

It seemed like a great idea, but at first no one figured out how to make it succeed on a consistent basis; therefore, the media attacked relentlessly and continually. News articles featured destitute families who had lost their life savings through franchising schemes. Virtually every state attorney general in the U.S. condemned the new marketing method. Some congressmen even tried to outlaw franchising entirely.

Over the years, however, Ray Kroc and his management team at McDonald's developed a turnkey franchise business team at McDonald's franchise. The newfound success-from the system-turned public perception of franchising around. Today, virtually every franchise business models-to some extent-the franchise business system created by McDonald's, making franchising one of the most respected ways of doing business in the world.

Modeling is simply learning what other successful people have done to achieve success in a specific area, and then doing the same thing. Someone said that "education is the shortcut to experience." With modeling, you literally leverage your own learning with the collective years of learning through experience of many others. Modeling the success of others saves both time and money and reduces frustration and stress.

The light at the end of the tunnel, for you and millions of others today, is the financial opportunity that starting your own business offers. If you have one going already, then make sure you are enjoying the many financial advantages to which your smart choice entitles you. The tax advantage alone can make a home-based business the single best financial move you could ever make.

Take A Bite Out of Your Taxes Before Year’s End! Top of Page

 You are coming to the end of the year. You hopefully made your estimated tax payment in September and now are wondering “What can I do for this year to both reduce this year’s taxes and next years taxes?” This article will give you some relief for the "tax time blues."

1.Max out your contributions to IRAs and other pension plans: You could put money into an IRA(if you are not covered by a qualified plan) if you are married filing jointly and make less than $150,000 of Adjusted Gross Income. Single people must make less than $95,000. I recommend that you set up a Simplified Employee Pension (SEP) that allows you to put away 20% of your net income up to $40,000 for you and the same for your spouse. You can make the contribution before you file your tax return next year but the plan MUST be in existence before December 31.

2. Offset capital gains with capital losses: If you have a stock loss or other capital losses, you can use these losses against any other income but the offset is limited to $3,000 per year. However, they can be used to offset all capital gains. Thus, if you have any capital gains, sells items that produce a capital loss to offset the gains.

3. Direct your broker to sell the latest stock purchased: Interestingly, when you sell stock, IRS assumes that you sold the earliest stock purchased. Thus, if you bought some shares for $30 a share, then for $40 per share then for $50 per share, IRS assumes that you sold the shares that cost $30 first. This gives the maximum amount of gain. Always direct your stockbroker to sell the latest shares first. You will receive the same amount of money but end up paying the least amount of tax.

4. Don’t forget the new child tax credit: . In 2002, you get a  $600  tax credit for each dependent under age 17. This is better then a deduction since it is a dollar for dollar reduction in your taxes. The catch is that if you are single, it starts phasing out when your adjusted gross income (AGI) exceeds $75,000 and for married people, the phase out starts at $110,000.

5. Take advantage of the other new tax credits: You can get an extra $1,500 Hope Scholarship credit for yourself, dependents or spouse to offset any college or graduate school tuition. What Congress gives they take away. This credit phases out at $40,000 if you’re single or at $80,000 if you are married filing jointly.

You may also be eligible to receive a lifetime learning credit of $1,000 for educational expenses. The same phase-out applies as with Hope Scholarship Credits. Some of these credits can be used as alternatives to each other. See your accountant about this.

6. Deduct all prior points paid to get loans when refinancing Due to declining interest rates, you may have refinanced your home or rental property. If you paid any points on the original loan that was not deducted, you may deduct all unamortized points upon refinancing. This is an often-overlooked big deduction that requires to your look back several years at your settlement sheets.

7. If you don’t deduct it, give it away: When you sell stock or art, you will pay tax on these items. Instead, give away-appreciated property to charity and get a deduction for the full fair market value. The key is to give away property that was used personally such as used clothing, electronics or to give away investment property held for over 12 months. If the investment property is held less then 12 months, your deduction is your cost, yuck! Also under recent tax law, if you give $250 away in cash to a charity in any one-month period, you need to get a supporting statement from the charity that you gave this gift. Don’t forget to ask your local church or synagogue to give you this statement at year-end. A gift of $5,000 or more or property requires an appraisal by a certified appraiser.. Check with your accountant regarding large gifts to charity. Finally, bunching your charitable deductions may be the way to go if you don’t ordinarily itemize your deductions. Pay for all dues or tithes this year for two years. You might want to charge the charitable gift on your credit card and get the deduction this year even though you don’t make the credit card payment until next year. I should note that, however, if you have inventory that you want to deduct (such as inventory gotten through mandatory monthly purchases), you can donate some of this inventory and get a charitable deduction for your cost. Get an itemized statement of what was donated.

8. Maximize the benefits of holiday gifts: First, all business gifts are deductible to prospects. The good news is that year-end gifts, birthday gifts etc. can qualify as a business gift. Congress isn’t that generous. There is a limit of $25 per person per year, and a husband-wife is considered to be one person for tax reasons. Gifts, however, to organization for the use of all their employees do not have a $25 limit. Thus, if you give a gift of candy to the head of the local IBM plant or union office with directions that this is to be for all their employees (that is not to be used by only one person), the gift becomes fully deductible.

9. Maximize your tax-free allowances: Good estate planning allows you to give away up to $11,000 per person per year with no gift tax. If you are married and your spouse is feeling very charitable, you can give away up to $22,000 per person per year gift tax-free.

10. Don’t forget social security numbers for your new children: If you want to add your new "bundle of joy" to your list of exemptions, you will need to get a social security number. You cannot claim them as an exemption without a social security number listed on your tax return.

11. Use the gift leaseback technique to shift a bundle of income: You can sell some stock or real estate at a gain and have it taxed to your tax bracket or, if you are luckier and have held onto the property for at least one year, you can get a maximum capital gain rate of 20%. How would you like to cut your taxes on all stock sales and sales of real estate and collectibles by as much as 50%?! No kidding! The technique is both simple and very little used. Give the stock or real estate or collectibles to your children or grandchildren. One day later, they will sell the gifted property and have the gain taxed at their tax bracket. If you have relatives in the 15% bracket, this could save you a bundle! Moreover, if they are at least 14 years of age by December 31 and are in the 15% tax bracket, any long-term gain is taxed to them at a special 10% long-term capital gains rate, not at your normal long-term rate of 20%. This can result in a potential savings of a whopping 50% of the tax!! There is one pitfall that you should be aware of. This technique should only be used with children or grandchildren who are at least 14 years of age. Otherwise, the gain (over $1,500} is taxed to you at your normal tax bracket. If you consider that the stock market has appreciated by at least several trillion dollars, the benefits of everyone using this technique can be enormous.

 The bottom line is that the holidays can be very expensive with all the party costs and gifts. However, with a little bit of proper tax planning, you can make both your holidays and your life a lot less taxing!