You, Inc.

The major difference between you as an employee and you as a business owner is that as an employee your income is taxed and then you pay your expenses with what is left over.  As a business owner, you pay taxes on the income left over after you pay expenses. 

As an employee of a company, you get paid, say, a $100.  Then you pay Federal income tax, state income tax, local income tax, Social Security tax and Medicare tax.  With the $55 you have left, you have to pay everything else. 

But let's assume you have a business and your tax return will look something like this:

Sales

minus Cost of Goods Sold

minus Advertising

minus Car and Truck Expenses

minus Commissions and Fees

minus Contract Labor

minus Depletion

minus Depreciation

minus Employee Benefit Programs

minus Insurance

minus Interest

minus Legal and Professional Expenses

minus Office Expense

minus Pension and Profit-Sharing Plans

minus Rent

minus Repairs and Maintenance

minus Supplies

minus Taxes and Licenses

minus Travel, Meals and Entertainment

minus Utilities

minus Wages

minus Other

minus Expenses for Business Use Of Your Home

Net Profit or (Loss)

It won't look pretty much like that, it will look exactly like that because that is Schedule C, Profit or Loss From Business, Form 1040, Department of the Treasury, Internal Revenue Service.  A bit intimidating the first time you do it but pretty easy after that.  And a good accountant can do them in their sleep.

But the main take away is that you pay your tax and Social Security on the BOTTOM number, not the TOP number. 

But, you say, I still have to make enough to live on and that is taxed.  That's true but a lot of the stuff you need to live on is, or will be or can be, part of the business and thus deductible.  And small business owners deduct a lot.

Take a look around at your cubicle.  But, first, get up and get a cup of coffee or some bottled water out of the breakroom.  Tax deductible to the company--the breakroom, the coffee, the bottled water.  You are reading this using the company computer, monitor, internet service--all deductible.  You like what you read so you print it out on your printer, staple it with your stapler, put it in the company mail--all deductible.  You have a business trip, take a limo to the airport, get on the plane, stay in a hotel, eat a lot of meals--all deductible.  (Meals are subject to some really dumb rules that have their basis in some really stupid thinking.  If anyone is interested in the history of the Two Martini Lunch Tax Act, let me know.)   And the convention is in Las Vegas, not Cleveland.  And the expense is tax deductible. 

So now you are home and you look around--coffee, bottled water, computer, internet service, printer, trips to the airport, cell phone, and maybe a home office.  And a car.  And property taxes, mortgage payments or rent.  Heat, gas, electricity, newspaper.  All deductible to some degree--if you owned a business.

"But I don't, you moron!" you scream.  Well, get one.  You don't have to quit and risk everything.  If you want to, go ahead.  But you could also start a part time business doing, well, anything.  The IRS doesn't really care what you do as long as you are serious about making a profit someday (don't quote me on this but I think you have to be profitable in 3 out of the last 5 years or something like that.  But that is open to interpretation as I don't think GM has been profitable in the last three years and they are still deducting stuff.) 

Let's say you keep your regular job and start a company selling Beanie Babies, or whatever, on Ebay.  After deducting postage, electricity, mileage at 48.5 cents per mile, your computer, your coffee, your bottled water, etc. you have a loss of $20.  That loss of $20 is netted against your income from your day job of $100 so you pay taxes on $80.  That's a tax break.

I am not giving tax advice.  Read the disclaimer to your left.  But business owners use the tax code to their advantage and deduct just about everything.  And some of it is not ethical.  I looked at a business for a friend who decided not to buy it because the owner only made $25,000 a year.  I got a look at the books and after adding back the owner's Mercedes, travel, country club dues, home lawn service, payments to her kids who never set foot in the place, and so on, the company turned about $90,000 in real profit.  The guy still didn't buy it.  I should have but wasn't interested.

The $90,000 lady is not who you want to be but you do want to use the system to your advantage and take advantage of what is offered.  The taxing authorities know that running a business is tough so they give you some breaks.  Take advantage of them.

Comments

[Anon]

This is the absolute fastest way to get audited.

[justanotherblogger]

Great post. I've been thinking about this recently also. So I assume you have your own business?

Can you take a post and explain to us the entire process and what your business does to try to make a profit?

[Jon]

Your blog is awesome. Though, I would also like to hear about the two martini tax act.

[ovett]

Two martini lunch tax act

[ovett]

I'd love to know about the two martini tax lunch tax act if you get a chance Mr William.

ovett