Everyone knows the rich don’t pay taxes. What many don’t know is how you can save millions in taxes by starting a home-based business. The rich who legally don’t pay taxes are those who make their money in business and/or as professional investors.
In comparison, rich people who earn their money in a job, as a professional, such as a lawyer or doctor, and those who earn their money as entertainers pay as much as 60% or more of their earnings in taxes.
Instead of paying this 60% tax, start a business (either full-time or on the side). Anyone can easily set up a home business, create a website, and form a legal entity to maximize tax savings. Contact an attorney for advice on the best type of entity (such as a corporation or LLC) you should set up. And reach out to a CPA to discuss tax savings from the start. Another method of reducing your taxes would be to create an offshore company in Belize or in another popular offshore jurisdiction.
Few people understand that the purpose of the tax law is not just to raise revenue for the Treasury. One of the primary purposes is to provide incentives for people to do what the government wants them to do. Years ago, the government figured out that a tax incentive could produce major results since people hate paying taxes.
So the government began using the tax law to encourage economic, environmental, and social activities. For example, you get a tax deduction for buying a house, but not for renting. You get a tax credit for buying an electric car (encouragement), and pay huge gasoline taxes (penalty) for using a gas-powered automobile. You also get rewarded with tax credits for sending your kids to college and tax deductions for donating to charity.
What you may not know is the biggest tax benefits go to business owners. And small business owners can get even bigger tax benefits than big businesses. It just takes a little education about the rules and understanding that the more you invest in your business, the more tax benefits you receive.
For example, any expense you have can be deductible if it meets three basic requirements.
- First, there must be a business purpose.
- Second, the expense must be ordinary, which means it must be a typical expense in your industry.
- And third, the expense must be necessary to your business, which means that it will either produce a profit or increase your market share.
These requirements mean that even your meals, entertainment, automobile, travel and education can all be deductible if they meet these three tests. Of course, you also must document your expenses. Retain your receipts, and document clearly on the receipt the reason you spent the money.
Just think of the tax savings if you were able to deduct some or most of your expenses. If you are even in a 30% tax rate, that’s like the government sharing 30% of the cost of your deductible expenses. You literally make the government your business partner. Only, the government doesn’t have a say in your business, as long as you keep good records and hire a good tax advisor to represent you.
There are hundreds of tax benefits for home-based businesses beyond deducting your expenses. One that many people miss is the Home Office Deduction. This tax rule allows you to deduct a portion of your home maintenance, utilities and even part of the cost of your home. And it won’t raise any audit red flags (contrary to popular opinion), so long as you set up your company as a partnership or corporation (S-Corp, C Corporation, LLC, etc.).
Another deduction many people miss is the research and development (R&D) tax credit. In addition to a 6% credit for your R&D expenses on your federal tax return, many states have terrific tax credits that you can take on your state tax return. Arizona, for example, has a 20% credit for R&D. And a credit is much better than a deduction because every dollar of a credit goes right back in your pocket as a direct reduction of your taxes.
One final tax benefit that few people understand for a new business is how to avoid taxes if you sell it. If you are starting a business that you believe could have real value in the future and you plan on selling, you can set it up in a way so you are not taxed on the sale.
These tax incentives are just a few of the many advantages of setting up a home-based business. When you do, be sure to get educated on the best way to set up your business for tax and legal purposes. And spend some time with a CPA to help you take the greatest advantages of the tax laws from the beginning. And then watch as your business income increases while you save millions over your lifetime on taxes.
