Enjoy Lucrative Tax Breaks and Greater Independence
By Seth Van Brocklin
Go beyond financial investments – here’s how to bring more cash into your home.
Micro-business opportunities are the way forward – see why here.
One of the keys to being financially resilient in the years ahead may be having your own business. Not necessarily something you do full-time as a primary income source. But something you can do in your spare time or in retirement, and ramp up or ramp down as your lifestyle needs dictate. This is what I refer to as a spare-time business.
A spare-time business is something you can establish without necessarily committing the time or capital expenditure associated with a traditional start-up enterprise. It’s something you can do with limited resources and without incurring huge risks. But by being in business, you’ll become eligible for lucrative tax write-offs that aren’t available to employees or passive income earners.
When you work for wages, the government automatically takes a big bite out of every paycheck. You’re forced to pay for your food, transportation, clothing, and entertainment with after-tax dollars. When you’re in business, you have more control over how much in taxes you pay, and when.
You deduct all business-related expenses and pay taxes only on the actual net income (profit) your business generates. If your business generates losses, then you can use those losses to offset other forms of income.
First, Make Sure You Have a Business Mindset Needed for This Great Option
With that said, going into business isn’t for everyone. Most small businesses fail. They eat up too much capital or take on too much debt and fail to manage risk properly. You can reduce your risk of losing money by focusing on low-risk business models with minimal capital investment required.
Even then, not everyone is wellsuited for entrepreneurship. It takes a certain type of self-starter who is independent but open-minded, confident but careful, ambitious but realistic. If you possess these traits or are willing to work to develop them, then you may have what it takes.
A Hobby-Based Business Can Change Your Financial Outlook Fast
If you have no clue about what kind of business to start, then start with what you know and what you enjoy doing. Turn a hobby into a business by finding some way to provide value to people who are involved in your hobby.
It can be fishing, photography, model trains, stamp collecting, or anything else. If you’ve acquired skills or expertise, why not try to market them?
It’s important to keep in mind that while a hobby can be the basis of a business, they are very different categories of pursuit. You are in business to make money. So never treat your business like a hobby. If you do, you’ll likely make poor decisions from a business standpoint. And you’ll risk losing your business tax deductions.
The IRS doesn’t allow hobby expenses to be deducted. It expects you to have a bona fide profit motive and operate in a businesslike manner.
Freelancing Opportunities For Businesses You Never Dreamed Of
It’s never been easier to offer your services as a freelancer. Whether you’re a handyman or a writer or a consultant, you can make a business out of doing gigs in your spare time. You can market your services to individuals or businesses. Increasingly, businesses prefer to deal with independent contractors whenever possible to avoid the regulatory hassles and costs of taking on new employees.
You can list yourself as a freelancer on web sites such as Elance/Upwork, TaskRabbit, Guru, Angie’s List, and Home Advisor. On the flip side, if you’re looking for some help with
projects for your business but don’t want to hire employees, you can hire a freelancer! (Beware of scammers who post flyers and ads on sites such as Craigslist.)
To be safe, only work with contractors who have verifiable track records.
Real Opportunities in Real Estate Can Put Your Broker to Shame
Businesses involving real estate transactions, management, or rentals are often well-suited to a spare-time commitment. It’s easy to get into real estate since it requires no specialized training or skills and can be financed on much better terms than a small business loan. It’s also easy to get in over your head.
Real estate business models range from safe and steady to highly speculative. You might, for example, be able to get into business by renting out your already furnished basement. In such a case, you would start enjoying immediate cash flow with no additional mortgage or capital investment required.
Your only risk is that the tenant trashes the place – but your homeowner’s insurance and the tenant’s renters insurance can minimize your potential financial losses.
In order to expand your rental property business, you’ll want to acquire additional homes or apartments. Focus only on established or growing neighborhoods where the rental market is tight. You’ll be better off targeting families, who tend to stay put, rather than singles or college kids who are likely to move out at the end of a 1-year lease (or sooner).
Yes, House Flipping Can Still Work.
Investing in income properties isn’t a way to get rich quick. Speculating on properties you can turn around and sell for a profit (“flip”) is a way to generate profits quickly. Or lose your shirt just as quickly.
House flippers acquired a bad reputation after the housing market melted down in 2007 and 2008. They became emblematic of the greed-fueled speculation that drove house and condo values to unsustainable heights. But they didn’t cause the housing bubble. Ultra-low interest rates, irresponsible lending, and government incentives to put people into homes they couldn’t afford caused the crisis.
House flippers actually serve a useful purpose in the market. They buy ugly houses that would otherwise be hard to sell to actual owner-occupants. Flippers invest in improvements and renovations that boost the appeal (and value) of the homes. That’s how they make money – by adding real equity.
What You’re Not Being Told About House Flipping 2.0
If you find a house in a good neighborhood that is structurally sound but cosmetically challenged, that is an ideal candidate for a flip. A house flipper should have some design or handyman skills. Having to hire professionals to do everything will eat into your profit potential.
Much can go wrong during a house flip. Even if you do everything right, a sudden downturn in the local market could send your flip underwater.
Easy as 1-2-3: Set Up a Home Office, Use It for Business, Deduct Your Expenses
The home office deduction is one of the most lucrative tax breaks available to home-based businesses. Even part-time home businesses can be eligible for the deduction (if they meet certain criteria).
Even if you don’t have a separate dedicated office in your home, you can still claim a partial home office deduction. If, for example, you have a desk, a bookshelf, and a filing cabinet in your bedroom that you use exclusively for business, then compute the total area your work space takes up as a percentage of your home or apartment’s total square footage.
How much time do you need to spend at your home office in order to be able to claim the deduction? Actually, there’s no particular time requirement. You don’t need to operate a full-time business or put in 40 hours a week in order to have a bona-fide home office.
However, the IRS says your home office must be a “principal place of business.” That means that if you do the bulk of your business outside your home office, most or all of your home office deduction could be thrown out. You should do at least half of your business out of the home office and be able to demonstrate that the home office is integral to the work you do.
Ins and Outs of Claiming the Home Office Deduction
As long as all your numbers add up (this is where accountants come in handy), you probably won’t be flagged for an IRS audit. It’s true that the selfemployed in general are more likely than wage earners to be audited. But rarely is anyone audited solely on the basis of having claimed a home office deduction.
Many home-based business owners foolishly avoid claiming the home office deduction because they fear the IRS. If your deduction is legitimate and you can back it up, then by all means take it!
The key limitation on the deduction is that you cannot use it to create or deepen a business loss. In other words, your business must be generating net income. However, you can carry forward the unusable deduction to future years when you have ample profits.