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Home Business as a Tax Dodge
by Wendy Priesnitz
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.
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