Did you know that the IRS allows you to deduct as much as $10,000 from your personal taxes in the year before you open up a company? Then, as if that weren’t reason enough to come over all entrepreneurial, in the same year that your business starts, you are also permitted to deduct additional ongoing expenses, including home offices, transportation, advertising costs, travel and so on.
So, while the simple answer to the question of whether starting a small business can help you lower your taxes, is undeniably yes, it is a little more complex than that. Let’s take a closer look:
How is a business for tax purposes defined?
Provided you “carry on the activity for the production of income from selling goods or performing services” and the IRS are satisfied with this, they’ll define your company as a business.
If you’re a start-up entrepreneur, it’s important that you define your business as ongoing trade, and not as a hobby, as any expenses associated with a hobby are not allowed tax deductions.
Proving that your business is not a hobby
If your business made a profit for any three of the past five consecutive years, then your company is definitely a business, not a hobby; this is the rule used by the IRS when determining profit motive. This means that you should avoid claiming a loss for the third year in a row, otherwise you risk triggering an IRS audit.
You can also provide evidence to the IRS that you’re trying to make money, when proving that your company is more than a hobby. You can use your website, accounting books and separate bank account to do this.
Business ideas to get easy tax write-offs
Below are some of the most common types of business ideas that you can use to help successfully reduce your taxes:
- Consulting – you can base your consulting company from home if you choose, and travel to your customers, or you can operate your service over the telephone and internet. Costs you’re able to deduct for tax purposes, are home office space, telephone lines, internet access fees and computer equipment.
- Internet services – from designing websites and coding, to programming and e-commerce stores, there are plenty of services you can offer customers related to the internet.
- Artisan – with the ability to deduct expenses for materials and supplies, and travel to fairs and exhibitions etc. by starting a business creating handmade arts and crafts to sell in galleries, craft fairs and online, you can lower your tax burden.
- General services – this can range from hairdressing and massage, to event planning and tutoring, and because you’re allowed to deduct all your equipment, tools and material costs etc. it’s a great way to save on your taxes.
Want to know more about starting a business and reducing your tax burden? Schedule a free initial consultation with an accountancy firm who specializing in helping start-ups and other small businesses get up and running, and start saving money on your taxes.