Home Business as a Tax Shelter (website design services)

November 30th, 2009 admin Posted in internet |

By Jake Saab

Starting and operating your own home based business is the ultimate tax shelter.

Although this article has been written from a Canadian income tax perspective, the principles should be practical in other tax jurisdictions.

1. Non-Deductible Personal Living Expenses

All of us have expenses that we incur in everyday living.

Either you rent an apartment or house or you own your residence. Utilities, insurance, rent, mortgage interest, property taxes, and maintenance and repairs are typical costs of operating your home.

Likely, you have a vehicle which also consumes large amounts of cash.

Add to this, dining out, entertainment, gifts, alcoholic beverages, office supplies, telephone and many other expenditures, and you have a significant cash outflow.

In most cases, as an employee, retired person, investor, student, or homemaker, few of these expenses are tax-deductible to you.

This means that you must earn a considerable income, pay your income taxes first, and then use what is left to pay all your expenses.

Some employees may be able to write-off some of their employment related expenses, if such are required by their contract of employment. However, even in this situation, the tax deductions are very limited.

2. Your Own Home Based Business Means Tax Deductions

Now consider the situation where you decide to start your own home based business.

Suddenly, many of your everyday expenses are now being used for business purposes and are now tax-deductible.

If you use one quarter of your home exclusively for business use, you will be able to deduct (or write-off) one quarter of all related occupancy costs. These expenses may include maintenance and repairs (that are not capital in nature), rent, mortgage interest, house or apartment insurance, power, heat, water, and property taxes.

As well, your vehicle expenses used for business purposes are another tax write-off. If you use your car ninety percent for business purposes, you can deduct ninety percent of your vehicle insurance, gas and oil, maintenance and repairs, car washes, license and registration, auto club, loan interest (within certain limits), and other costs from your income. You may also write-off one hundred percent of your business related parking. Capital Cost Allownance (C.C.A.) on your vehicle is also allowed for income tax purposes; depreciation is the accounting term for this tax deduction.

The Canadian government also allows as a deduction, fifty percent of your business related entertainment expenses.

Also tax-deductible are business related telephone expenses, Internet access, office supplies, travel, books, memberships, and a host of other expenditures.

3. Income Splitting with Your Home Based Business

If you have a high paying job, you will pay higher taxes because the rates of tax increase as your income does.

With your own business, you can pay reasonable wages to your spouse and children. In this way, you can legally divert income taxed at your higher rate to your family members that are in a lower tax bracket.

This tax saving technique is called income splitting. It is another good reason why your own home based business is the ultimate tax shelter.

4. Even a Part-Time Home Based Business Works

Even if you have a full-time job, running a part-time business can be advantageous.

Of course, you must actually run a real, moneymaking business. Any attempts to write unprofitable hobbies off will ultimately fail with the taxation authorities.

If you earned eight thousand dollars during the year from your part-time business and were able to deduct eight thousand dollars in car expenses, home office expenses, entertainment costs, office supplies, and other business related expenditures, you would have a net business income of nil. You would pay no tax on this additional income.

Dont miss this important point! Although these tax deductions are actual, legitimate business expenses, these are expenditures you would probably have made anyway, whether you had a business or not.

Thus, by rearranging your affairs to start and operate a home based business, you have been able to convert non-deductible personal expenditures into legally deductible business expenses. You have successfully sheltered your income from tax and have split your income with family members in lower tax brackets.

Yes, indeed, your home based business has become your ultimate tax shelter.

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Pricing a Painting Project

By Jake Saab

Imagine this nightmare scenario…

You’ve spent considerable time and energy putting together what you consider to be a fair proposal for a decorative painting job that you really want to land. You’re finally sitting in front of your client revealing each intricate detail of the finish that you want to create on their walls.

Your client seems excited and eager to get started. At last, you reveal the total estimated cost of the project. Your client is speechless and just gasps at you in wide-eyed astonishment muttering that this is a lot more than she’d hoped.

Are you left scratching your head wondering where you lost your client in your sales pitch? It’s simple. You didn’t get a feel for your client’s budget during your initial consultation.

Most clients won’t reveal their budget to you even if you ask them because they always want to get a lower price. So ultimately you need to know a couple different ways of discovering out how much money your client is willing to spend.

The first way is to come prepared with a sample price list of all the wall finishes you do. This is not a price list, per se, but a general list that breaks down the starting rate for a basic room that measures 12 x 12 feet with 8 foot ceilings.

So for instance, let’s say your starting rate for a colorwash finish on a basic room size of 12 x 12 x 8 is $500. You show your client this price on your list and tell them that this is your starting rate and that you still need to factor in windows, doors, actual measurements of the room. By doing this your client will have some indication of your prices when you do come up with your actual bid amount.

The second way to gauge your client’s budget is by using your samples. After you’ve been decorative painting for awhile you’ll have a good idea how long each finish takes you to accomplish from planning to completion. So if you take the total cost of the finish (including materials and labor costs) and divide by the square footage of the room you’ll come up with an average cost per square foot. Take this amount and write it on the back of the sample of this finish in black marker.

As you’re reviewing your samples with the client you can either casually point out the cost per square foot or let them see it as they’re flipping the pieces over. You can guarantee they’ll be sitting there doing some quick calculations in their head as they’re looking at the square footage cost for each finish.

If you’re worried about whether your bid is too high which is causing your client to now flinch at the price, there are a couple of things you can do to prepare yourself to bid fairly.

First, do your homework in regard to the going hourly or square footage rate in your area. Call around to some other faux finishers or decorative painters to find out what they’re charging. When you’re speaking to them pretend you’re a buyer and ask for their basic rates. Now you’re armed with comparative prices.

Should you bid high or low on a project? I’ve always gone by the rule that if there are a lot of obstacles that will be a nuisance such as high ceilings, lots of windows, children or pets that’ll be running around, or if the client will be difficult to work with, that I can justifiably charge more for the contract.

Sometimes, when you’re first starting out and you’re really hungry for the job you may find yourself bidding low just to land the contract. On the other hand just make sure that you’re not bidding so low that you’re working for minimum wage.

Also, when contractor’s bid low they skew the value of the work within the market unfairly for other decorative painters, which is unfair to the industry as a whole. Remember what they say: “if you get all your bids, you probably are not charging enough”.

As you can see, there’s a lot to consider when you price out a painting job. But with a little preparation you can win more painting contracts and prepare your client for your proposal.

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