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Running a home business can give your family a huge tax advantage. However, if your business loses money year after year, some of these advantages may disappear.
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First, let’s consider some typical home business tax deductions:
- 1. Depreciation of household goods: When you run a business at home, you can depreciate some of your household goods and deduct them from your tax return – of course, they must be the part that serves the business. If you rent a house, you can distribute part of the rent to your company, so you can also achieve tax relief. If you depreciate your home office for business purposes, when you sell your house, the tax exempt sales may trigger the capital gains tax. The beauty of depreciation deduction is that you don’t have to pay a penny for it. Simply allocate the part of your family that is dedicated to the enterprise to create eligible deductions without cash outflow.
- 2. Mileage deduction: Even in your business, driving back and forth to work will be regarded as commuting and not tax deductible. And if you work in a home office, you can deduct tax on the miles you drive around for business purposes. If you own an economy car, the tax deduction is likely to exceed your actual car expenses.
- 3. Mobile phone: If you have to use a mobile phone at work, you can deduct this part of the cost when paying taxes – although you also use the same mobile phone in your private life.
- 4. Other daily business expenses: For other household expenses, if the subscription of relevant magazines and newspapers may also be related to business, you can also use them to realize the tax deduction.
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As you can see, just starting a family based business can give you tax relief that you can’t get from working for others – or benefits that you can’t get even if your own business is not a home based business. The following is a supplementary explanation of these exemptions:
- 1. Inertia loss rule: If the IRS believes that your business loss is a habitual behavior, they will not allow you to deduct tax. This rule is subjective, but generally speaking, if you have a small family business and it has never made a profit, the IRS is likely to think it is an inertial behavior, then your business losses will not be able to deduct other income before tax. In addition, if you do not have other gains that can be deducted by losses, the attraction of home enterprises to generate losses will disappear.
- 2. Scale: For a typical home enterprise, its annual cost may be less than 10000 dollars. If your business can bring large profits, the cost of home business will not be much different. In this case, you may be more inclined to move the enterprise out of your house than to continuously offset the limited expenses.
- 3. Social security and medical insurance tax: When you work for others, you only need to pay half of the social security and medical insurance tax – your employer will pay the other half. But when you start your own business, you need to pay the full amount. Therefore, if you set up a home enterprise that can generate 50000 US dollars of profits every year, you actually need to pay more taxes for the 50000 US dollars of profits compared with a job where you can get 50000 US dollars of salary every year.
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If you are very interested in starting a business and intend to operate at home before it reaches a certain scale, please note that the possible losses in the initial years can help offset the taxes you pay for your income. If you want to create a business that only aims to bring tax advantages, you are unlikely to take the lead in this game.
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Please be sure to consult a certified public accountant before completing your tax return or starting a home business.