Generally, the people I help have a job working for someone
else. For those individuals who plan to continue working for someone
else the primary reason to start a hobby based sole proprietorship is the
tax advantages. No one in the initial stages of my program should end up
owing federal taxes at the end of the year. Why? Because if you are working
for an employer who is taking federal income taxes out of your paycheck, you
have a great chance of having most, if not all, of that money given back to
you at the end of the year when you file your taxes because of the tax
advantages you are now qualified for as a small business owner.
The
"secret" to getting all your federal income tax back is arranging your
lifestyle around your hobby based business. What you used to do for fun or
even necessity will now be tax deductible because it is part of your
business.
EXAMPLE:
Your favorite hobby is cleaning and
restoring antique guns to working order. You are good at it and there is a
market for it. You know that because your friends ask you to work on their
guns too.
So you start a sole proprietorship business. There
are several steps you need to consider prior to opening your business, but for the sake of brevity in this article I
will only list some of the bigger ones. Your business name is "Smith's Gunsmithing" and you got a license from your municipality to operate your
business out of your home. You filed for an employer identification number
and a sales tax certificate. Finally, you placed a $25.00 ad in the
PennySaver, for example, announcing you are open for business. Now, everything you used to
buy or do for your hobby is tax deductible because you need to do them in
order to operate this business. However, there are other items that are
going to become tax deductible.
Part of your house, utilities, mileage, and
insurance are deductible because you use part of those things for operating
your business. In this particular example books, magazines, internet, phone,
and trips to gun shows can be included. At this point it is important that
you are working with a counselor or are having an accountant complete your
taxes. He or she will be able to identify other areas that should be tax
deductions. Ideally, your coach or counselor will help you identify many
things that can be deducted or can be arranged to become tax deductions.
What does that mean? Here is an example: when I review my students' budgets and financial plans with them we
highlight areas in their personal life that can now be listed as tax
deductions. In the example above the individual used to buy magazines to
further his education on rebuilding guns. He still buys the magazines but
they are tax deductible now because furthering his gunsmithing skills is a
legitimate cost of doing business.
I have heard objections from some about
starting their own business. I would like to address some of those
objections here because I personally believe, based on my experience, that
small business does more good for this country than anything else. On the
individual level small business ownership is very easy to obtain in this
country and allows an individual to take advantage of tax advantages that
are not available to others. On a larger scale the income that small
business owners generate stimulates our economy unlike any other activity.
However, there are people that don't support my belief. Some people have
stated that it is un-American to not pay taxes; it is not fair that some
people pay federal income taxes and others don’t.
Their premise is that
we should all be paying taxes to support the spending our country does.
I would like to say that anyone who owes taxes should pay them! I am not
proposing tax fraud but rather tax reduction through small business
ownership. Instead of giving the government my tax money I would rather
give it the way I see fit. Two things can happen. I can give the money
that I saved to the organizations I want to promote. Or, I can spend
that money in any number of ways. That spending or investing act
supports the economy and keeps people employed. Even if I put that
money in the bank the bank is going to help someone else out by lending
them that money. Even Barack Obama is encouraging of those who wish to
start a small business.
Read his quote.
Another thought is inflation. Having the money
available now that you would have paid in taxes allows you to purchase
assets today versus years from now when the cost will be higher due to
inflation. Those assets can be generating income or additional tax savings
now versus later in the future.
There are many benefits to owning a hobby based
small business. Many more than I have listed here. Your goal is to generate
income from doing the things you would have normally done. (Also remember
that if you have more than one hobby that can make money there is no reason
why you can have two businesses! Perhaps you are married and both you and
your spouse want to own a business. That is ok as well.) While doing the
things that used to be just a hobby you will generate income two ways: by
the amount of money people pay you to do your favorite hobby and through the
money you will get back due to your tax deductions. Small business ownership
will be one of the best things you can do to improve your personal financial
situation.