Q:
I have a full-time salaried position with a medium-sized company. I
pay a considerable amount of income tax. I am thinking of starting a
home business to reduce the amount of income tax that I have to pay.
Is this a workable strategy and, if so, where can I find information
about possible avenues to take me there?
A:
Your accountant is the first person to consult. However, I can give
you some general information, which will likely indicate to you that
this is a bad idea.
Theoretically,
you are allowed to subtract a business loss from employment income
when you file your personal income tax form. However, you need to be
aware that the government wants to discourage tax dodges like
you're suggesting. So they would want proof that you were
seriously in business - that is, you would need to demonstrate that
you were putting a reasonable effort into showing a profit.
You'd
probably be able to get away with subtracting a business loss from
your employment income for a few years, but you'd need to show
some revenue on your statement of income and expenses. From that
revenue, you'd only be able to deduct actual expenses incurred.
And of course, if the business made money, you'd be in a worse tax
situation!
In addition to other legitimate business expenses, you could use some
of your personal automobile expenses as a business deduction.
However, you'd have to keep a mileage log to prove that the
expenses were actually incurred in the course of running your
business.
In some locations, those
who run home businesses can use a portion of their household
expenses as a business deduction. But this usually only benefits those who
are making money, since the
rules often do not allow you to create or increase a loss by using this
home office deduction. Wherever you live, I advise you to read the
relevant tax guide and/or consult an accountant who specializes in
small business. That way, you'll know what's appropriate for your
situation, and set up your recordkeeping properly right from the
start.
Other than that, one of the main reasons not to consider running a
business as a tax reduction strategy is that self-employment takes a
great deal of time, effort, and dedication. And it can be financially
risky. Before you start a business, even on a part-time basis, I
advise you to think carefully about what's involved.