April 15 is looming just around the corner and many are scrambling to find any income deduction they can to reduce their tax burden.
No one likes paying Uncle Sam more than their fair share.
One segment of the population that is sitting pretty this tax season is the group engaged in home-based businesses.
Running a home-based business in a business-like fashion with an intent to make a profit allows the owner to maximize their income deductions, especially if they work as regular job as well.
In this article I present the case study of Carrie, an actual person (whose name has been changed) who is considering a home-based business.
Using the IRS's withholding calculator, we can calculate Carrie's actual income deductions if she did start a home-based business.
Carrie is single and is just starting out in her career in hotel administration in a medium-sized city.
She works long hours in her job five days a week (sometimes on weekends, too) and is determined in climb the career ladder quickly.
Her salary is $40,000 per year, which puts her in the 25% tax bracket for 2008.
Carrie has no children or dependents, makes no contributions to a retirement plan, and no mortgage (she rents an apartment).
She is also extremely conservative and claims no special deductions on her W-4.
She is "Career Carrie" and she pays a lot in taxes and is looking for some income deductions she can use to reduce her tax burden.
Can a home-based MLM business help Carrie claim some legal income deductions? Yes.
For 2009 (if all factors remain the same) according to the IRS website's withholding calculator, Carrie's employer should withhold around $4,260 during the year from her paycheck for her taxes.
That's around $355 per month worth of withholdings, which is no small change.
But if Carrie started an MLM business in her home she could reduce the amount of her withholdings to fund business and eventually generate a second, passive stream of income that would also be a continuous source of legal income deductions.
So how can Carrie use expenses incurred by her home-based MLM business to claim income deductions and reduce the amount of withholding from her paycheck? By using these three steps.
** 1.
Estimate Gross Business Income ** Suppose Carrie estimates that it will take her a year to get her business off the ground and that in her first year her gross income from her business will be $1200 (or $100 per month).
Estimated Gross MLM Business Income: $1,200 **2.
Estimate Direct Expense Deductions ** Now Carrie has to estimate the amount of direct expenses from her business to figure out what she can legally claim as income deductions.
(Direct expenses are those directly related to a specific activity, in this case the marketing of Carrie's MLM business and products.
Indirect expenses are those not specifically related to an activity but necessary to keep the business in good running order, such as office space, electricity, and renter's insurance).
Carrie can deduct the following estimated annual direct expenses with the resulting net loss in her business for the year.
Children's wages: $0 Business mileage (7,500 miles x $0.
55 per mile) = $4,125 (includes commuting miles to regular job) Spouse's wages: $0 Telephone cost (amount above basic rate): $492 Product samples: $750 Promotional materials: $300 Overnight business travel: $100 Total Estimated Annual Direct Expenses: $5,767 Total Estimated Gross MLM Business Income: $1,200 Total Profit / (Loss): ($4,567) ** 3.
Estimate Additional Allowances Claimed on W-4 ** To claim her income deductions and reduce her withholdings, Carrie now has to figure out how many additional deductions she can claim on her W-4 form (the form that tells her employer how much to withhold from her check each month).
Since her business will show an estimated loss for the first year, she would need to divide the estimated loss by $3,400 to figure out how many additional deductions she can take (this formula is provided by IRS laws).
$4,567 / $3,400 = 1.
34 Additional W-4 Deductions Carrie Can Claim: 1 In terms of income deductions, how much is this additional W-4 deduction worth? Each deduction on a W-4 is worth the same as the personal exemption amount as specified by the IRS for the year.
For 2009, the IRS has stated that the personal exemption amount is $3,650.
How would that change Carrie's annual withholding? $4,260 (current withholding) - $3,650 (additional deduction) = $610 (new withholding) In other words, Carrie just reduced the amount her employer withholds from her paycheck from $355 per month to $51 per month.
The additional amount Carrie puts in her pocket every month to fund her business? $304 And since Carrie has estimated that her annual operating costs (gross income minus direct expenses) will be $4,567, she won't have to pay much to start her business.
Spreading $4,567 over 12 months means that Carrie has to spend $381 per month to launch her business in 2009.
Since Carrie is pocketing $304 a month from the income deductions and her reduced withholdings, she'll pay only $77 a month to get her business off the ground.
Carrie's situation is fairly typical for people wanting to start a home-based MLM business.
Should Carrie decide to start the proposed MLM business and claim these income deductions she will have to pay attention to certain factors, such as working her business on a regular basis, documenting her activities, and showing her intent to produce a profit.
All of that is too much to cover in this article but is covered in my other articles.
Remember, all the expenses and deductions covered in this article are totally legal and passed by Congress as law.
As long as you run your business in a business-like manner with an intent to make a profit, you can claim these income deductions.
In addition, these deductions can be used to offset all personal income of any type (thank you Uncle Sam!).
As always, check with a home business tax professional to cover all bases and, if possible, reduce your learning curve by working with an MLM team that has expertise in this area.
No one likes paying Uncle Sam more than their fair share.
One segment of the population that is sitting pretty this tax season is the group engaged in home-based businesses.
Running a home-based business in a business-like fashion with an intent to make a profit allows the owner to maximize their income deductions, especially if they work as regular job as well.
In this article I present the case study of Carrie, an actual person (whose name has been changed) who is considering a home-based business.
Using the IRS's withholding calculator, we can calculate Carrie's actual income deductions if she did start a home-based business.
Carrie is single and is just starting out in her career in hotel administration in a medium-sized city.
She works long hours in her job five days a week (sometimes on weekends, too) and is determined in climb the career ladder quickly.
Her salary is $40,000 per year, which puts her in the 25% tax bracket for 2008.
Carrie has no children or dependents, makes no contributions to a retirement plan, and no mortgage (she rents an apartment).
She is also extremely conservative and claims no special deductions on her W-4.
She is "Career Carrie" and she pays a lot in taxes and is looking for some income deductions she can use to reduce her tax burden.
Can a home-based MLM business help Carrie claim some legal income deductions? Yes.
For 2009 (if all factors remain the same) according to the IRS website's withholding calculator, Carrie's employer should withhold around $4,260 during the year from her paycheck for her taxes.
That's around $355 per month worth of withholdings, which is no small change.
But if Carrie started an MLM business in her home she could reduce the amount of her withholdings to fund business and eventually generate a second, passive stream of income that would also be a continuous source of legal income deductions.
So how can Carrie use expenses incurred by her home-based MLM business to claim income deductions and reduce the amount of withholding from her paycheck? By using these three steps.
** 1.
Estimate Gross Business Income ** Suppose Carrie estimates that it will take her a year to get her business off the ground and that in her first year her gross income from her business will be $1200 (or $100 per month).
Estimated Gross MLM Business Income: $1,200 **2.
Estimate Direct Expense Deductions ** Now Carrie has to estimate the amount of direct expenses from her business to figure out what she can legally claim as income deductions.
(Direct expenses are those directly related to a specific activity, in this case the marketing of Carrie's MLM business and products.
Indirect expenses are those not specifically related to an activity but necessary to keep the business in good running order, such as office space, electricity, and renter's insurance).
Carrie can deduct the following estimated annual direct expenses with the resulting net loss in her business for the year.
Children's wages: $0 Business mileage (7,500 miles x $0.
55 per mile) = $4,125 (includes commuting miles to regular job) Spouse's wages: $0 Telephone cost (amount above basic rate): $492 Product samples: $750 Promotional materials: $300 Overnight business travel: $100 Total Estimated Annual Direct Expenses: $5,767 Total Estimated Gross MLM Business Income: $1,200 Total Profit / (Loss): ($4,567) ** 3.
Estimate Additional Allowances Claimed on W-4 ** To claim her income deductions and reduce her withholdings, Carrie now has to figure out how many additional deductions she can claim on her W-4 form (the form that tells her employer how much to withhold from her check each month).
Since her business will show an estimated loss for the first year, she would need to divide the estimated loss by $3,400 to figure out how many additional deductions she can take (this formula is provided by IRS laws).
$4,567 / $3,400 = 1.
34 Additional W-4 Deductions Carrie Can Claim: 1 In terms of income deductions, how much is this additional W-4 deduction worth? Each deduction on a W-4 is worth the same as the personal exemption amount as specified by the IRS for the year.
For 2009, the IRS has stated that the personal exemption amount is $3,650.
How would that change Carrie's annual withholding? $4,260 (current withholding) - $3,650 (additional deduction) = $610 (new withholding) In other words, Carrie just reduced the amount her employer withholds from her paycheck from $355 per month to $51 per month.
The additional amount Carrie puts in her pocket every month to fund her business? $304 And since Carrie has estimated that her annual operating costs (gross income minus direct expenses) will be $4,567, she won't have to pay much to start her business.
Spreading $4,567 over 12 months means that Carrie has to spend $381 per month to launch her business in 2009.
Since Carrie is pocketing $304 a month from the income deductions and her reduced withholdings, she'll pay only $77 a month to get her business off the ground.
Carrie's situation is fairly typical for people wanting to start a home-based MLM business.
Should Carrie decide to start the proposed MLM business and claim these income deductions she will have to pay attention to certain factors, such as working her business on a regular basis, documenting her activities, and showing her intent to produce a profit.
All of that is too much to cover in this article but is covered in my other articles.
Remember, all the expenses and deductions covered in this article are totally legal and passed by Congress as law.
As long as you run your business in a business-like manner with an intent to make a profit, you can claim these income deductions.
In addition, these deductions can be used to offset all personal income of any type (thank you Uncle Sam!).
As always, check with a home business tax professional to cover all bases and, if possible, reduce your learning curve by working with an MLM team that has expertise in this area.
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