The United States has… Two Types of Tax Systems …
YOU might be in the Wrong Tax System.
Two Different Tax Systems
- The Tax System for Employees who pay taxes with a W-4 income and
- The Tax System for Home-Based Business owners who pay taxes based on business income and deductions.
The Employee Tax System
As an employee you are limited to the number and type of deductions you can take. Employees or W-2 wage earner, work for some else. They have few deductions available to them
- Mortgage interest and real estate taxes
- Standard deductions for dependents
- Gifts to church or charity
- Contributions to retirement plans.
The Home-based Business Owner
As a business owner you get to write-off a large majority of your njormal monthly expenses, this means a of your day to day expenses could be business write-offs.
Employee vs. Business Owner Tax Systems
Essentially the Tax System for Employees is a three step tax system:
- Work Hard to earn a decent wage
- Immediately lose a large chuck of those hard earned wages to taxes (taxes on total amount of earned income)
- Then live on the left-overs – called take-home-pay
The Tax System Home-based Business owners have a different three step tax system:
- Earn revenue from selling goods and services,
- Spend whatever expenses is needed to operate and keep the business financially sound,
- They pay taxes on what ever is left over (taxes on a partial amount of earned income)
For you to have a Home-based Business it requires proving that your business or part-time activity is a bona fide business. To do this you can use virtually any kind of evidence to show that you’re trying to make a profit. Business cards, a well-maintained set of books, a separate business bank account, current business licenses and permits, and advertising or other marketing efforts will all help to persuade an IRS auditor that your activity really is a business.
If you consistently use your business as a tax shelter, deducting your losses from your other income year after year, you’ll probably attract the attention of the IRS. Make sure that the IRS will consider your endeavor a real business before you start claiming deductions for the costs of your art projects or toy car collection.
The deciding factor in determining whether a business is legitimate is whether the activity is engaged in “for profit.” In other words, you must prove to the IRS that you’re trying — not necessarily succeeding — to make a profit with your venture.
Personal Expenses into valuable Business Expenses
A business is a business
- No matter what the size
- Has an intent to Make a Profit or
- Where it is located (in your home)
This means as the owner of a small, part-time business run out of your home, you should be treated no differently, for tax purposes, than the owner of a large business that is run out of a huge office building.
Here is a partial list of the tax-deductible expenses that businesses legally and routinely write-off and some of the home-based business expenses that YOU can legally write-off, too.