Just Picture It Now: Need a Tax Deduction? Own a Business!

The Number 1 way to reduce your taxes with a smile is to convert your personal expenditures into allowable deductions. How could this be you ask? Well, it’s not only true, but it’s a lot easier than you think. In Ron Mueller’s book “It’s How Much You Keep That Counts” he discusses in detail every major deduction, in black-and-white, the exact Congressional Law, the specific Article in the U.S. Tax Code or Federal Tax Court Ruling which specifically authorizes it.

One of the most surprising things I found was that the IRS does not require you to actually make a profit in order to write off these expenses, you simply need to be in “pursuit” of a profit. How cool is that?!

Here's how you do it: Turn yourself into a business owner. This is not complicated, expensive or difficult to do, and incorporation is not necessary. We got started in our business after only a few days of research, it cost us less than $500 to get started, and we simply used our Social Security Numbers for tax purposes.

Establishing a 'profit motive' is the key

To be in business, you merely declare it. And by doing so, you can magically turn personal expenses into tax deductions. If you want to operate in a noncorporate format, as an individual proprietorship, but under a different name than your own, no problem. It's easy.

In some states, you may have to file a "DBA" (doing business as) form with your local county clerk. Basically, you just fill out a form with your name, address and the assumed name under which you're doing business. For example, I might be "Doug Bauknight DBA BandBVacations.com."

Here's the best part: Your business doesn't have to make a profit for your expenses to be deductible. All you have to do is establish a "profit motive." Under the Internal Revenue Code, a "profit motive" is presumed if you earn any net income in any three out of five business years.

It's recognized and expected that new businesses probably won't make a profit in the early years. In fact, in the early years, you can insist that the IRS defer any challenge for the first five years as to the legitimacy of your business by filing Form 5213 (.pdf download).

Remember you don't have to show a profit -- just a "profit motive." The test for deductibility is whether you have an actual and honest profit objective. You need not have a reasonable expectation of a profit. The test is subjective: Was your intent to earn a profit? The IRS looks at the following factors to decide if your intentions are honorable:

- The manner in which you work your business.
- Your expertise and the expertise of your advisers.
- The time and effort you expend in working your business.
- The expectation that the assets used in your business may appreciate in value.
- Your success in carrying on similar or dissimilar activities.
- Your history of income and losses with respect to the business.
- The amount of occasional profits, if any, that are earned.
- Your financial status.
- The elements of personal pleasure and recreation.

That doesn't mean that just because you enjoy doing your "job" that the expenses aren't tax-deductible. The Tax Court has ruled that "suffering has never been made a prerequisite for deductibility."

Even if you're employed full time elsewhere, that doesn't prevent you from having a home based business on the side. When we first started our Home Based Business, I worked a full time job, and had two part time jobs to boot. This works whether your business is your primary source of income or it's a sideline. Mine was certainly a sideline the first year, but because we basically turned our hobby or cruising into a business, it turned into a full time business for us.

How to qualify as a business deduction

To qualify as business deductions, your expenses must be:

- Ordinary and necessary -- defined by the courts and the IRS as "reasonable and customary." - Paid or incurred during the taxable year.
- Connected with the conduct of a trade or business.

The term "reasonable and customary" depends on your specific business and the business customs in your locale. The expenses don't have to necessarily be reasonable and customary to you, but simply to your particular trade or industry. There are innumerable cases of "hobbies" converted into "businesses" with expenses allowed. Our hobby is cruising. So we became Travel Agents. It is customary for Travel Agents to preview cruise ships so we can inform our clients. BAM! All our cruising just became a tax write off. We also took a trip to Disney earlier this year, and took the kids. Why? Don’t you think it might be necessary to get a 3 year old and 5 year old perspective on what they liked about Disney?

Focus on your profit-making motive. Remember that it's not what you pay in taxes that counts, it's what you keep.

Next week I’ll post a list of things that you may be able to now claim as a tax deduction because you’ve started a business. Some of this list may surprise you so make sure you check back!

Doug & Ronda Bauknight
AKA: TravelPro
Travel Agent / Networker
Phone: 678.458.5812

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