A Sideline Business Can Reduce Your Income Taxes



Chapter 4: Advice From a Pro

A Sideline Business Can Reduce Your Income Taxes

A sideline business can open many doors to tax deductions. We would never recommend spending money for a tax deduction; however, if you’re going to spend the money anyway, you should do everything you can to make it tax deductible.

By having your own business, every dollar you spend attempting to make a profit becomes tax deductible. You can deduct expenses for auto, travel, office, office equipment (e.g., desk, chair, computer), contributions to self-funded retirement accounts, health insurance premiums, educational expenses, entertainment, business gifts, and more. You can deduct salaries of employees, even if they are your children, other relatives, or friends.

The business does not have to be your primary employment. If you lose money in the business, you can deduct those losses from your other income. The IRS says that you must do what a “reasonable business person” would do to make a profit. If you do not meet that test, the IRS will classify the operation as a hobby business, require you to report the income, and disallow the deductions.

Anthony J. Campolo

Columbus State Community College

Adv

from a Pr

Buy a Home to Reduce Taxes

Hanna Pallagrosi of Rome, New York, took a sales position at a retail chain store two years ago, where she earned a gross income of $46,736. Hanna wisely made a $1000 contribution to her IRA. Her itemized deductions came to only $3800, so she took the standard deduction and personal exemption amounts. The result was a tax liability of $6046. Hanna was not happy about paying what she thought was a large tax bill that year.

Gross income $46,736

Less adjustment to income – 1,000

Adjusted gross income 45,736

Less value of one exemption (old figure) – 3,200

Subtotal 42,536

Less standard deduction (old figure) – 5,000

Taxable income 7,536

Tax liability (from old tax table not shown) $ 6,046

Last year Hanna did not receive a raise. Nonetheless, Hanna continued to contribute $1000 into her IRA. To reduce her federal income taxes, she also became a homeowner after using some inheritance money to make the down payment on a condominium. During the year, she paid out $9126 in mortgage interest expenses and $1995 in real estate taxes. After studying various tax publications, Hanna determined that she had $3814 in other itemized deductions that, when combined with the interest and real estate taxes, totaled $14,935. These deductions reduced Hanna’s tax liability dramatically.

Gross income $46,736

Less adjustment to income – 1,000

Adjusted gross income 45,736

Less itemized deductions –14,935

Subtotal 30,801

Less value of one exemption – 3,400

Taxable income 27,401

Tax liability (from Table 4.3) $ 3,723

Hanna correctly concluded that the IRS “paid” $2323 ($6046 – $3723) toward the purchase of her condominium and her living costs because she did not have to forward those dollars to the government. An additional benefit for Hanna is that she now owns a home whose value could appreciate in the future. The best advice is to buy a home to reduce income taxes.

Frances C. Lawrence

Louisiana State University o

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