Financial Columns - Lynn Richardson
|Named by Urban Influence Magazine as one of the 20 Hottest Influencers in America, Dr. Lynn Richardson is an author, entertainment executive and celebrity financial coach who uses her quick wit and humorous presentation style to help others face their money issues and achieve personal, professional and spiritual harmony.|
Why Being an Entrepreneur with Proper Financial Planning Makes Dollars and Sense
The virtuous woman from the book of Proverbs was not only a good wife and mother, but she was also a great business woman. A review of Proverbs 31 reveals that she had at least nine jobs (she was a seamstress, a real estate professional, a trader, mother, wife, minister, household manager, vineyard owner and philanthropist). She had multiple streams of income. Yes, she was an entrepreneur!
We should take her lead today as we battle the economy and manage our financial legacies through the highs and lows of developing an entrepreneurial mindset. It's quite simple: being an entrepreneur with multiple streams of income — including a home-based business — is key to getting your money back when tax season arrives. The average American only gets about eight tax deductions (real estate taxes, mortgage interest, charitable donations and a few others). But if you are an entrepreneur with a home-based business and you actually run your business like a business instead of a hobby (see IRS advice here), there are over 475 tax deductions available for itemization on Schedule C of your 1040 tax return. Read 475 Tax Deductions for Businesses and Self-Employed Individuals.
One of my clients organizes her college reunion every year. Between site visits, travel and meals, she spends over $12,000 each year, and she's never made a profit in the past. But now that she is in business for herself as an Event Planning Consultant, she is able to write off every bit of her class reunion expenses that are related to her home-based business (see IRS Pub 334).
How about this: have you ever invited people to your home to eat and have a good time? Well, if you are an entrepreneur with at least one home-based business — and you truly have the intention to discuss business — turn your gathering into a business dinner party (see IRS Pub 463). Place information about your business near the food. Take pictures of people looking at your business cards. Answer questions about your business and always ask for referrals. When guests ring your doorbell, greet them by saying “How’s business?” Get it? I know you do! They may think you're strange, but who cares? As far as I'm concerned, it's always business, and what's most important, you can write off what you spent on meals, invitations and other items related to your business dinner party.
And yes, it's even business when it comes to the kids, too. The IRS allows you to hire your children to work in your home-based business and write off the income you pay them (they don't have to report it unless it's over $12,000 annually). They can use the money they earn (that you now get to write off) to buy school clothes, school supplies, dance lessons and more (see IRS Pub 15, Child Employed By Parents). It's money you would have spent anyway, but now it's a tax write-off. For me, $12,000 times three kids equals $36,000 in additional tax write-offs each year. And when nieces and nephews and godchildren ask for money, I hire them to complete a project in my home-based business. I send them a W-9 at the end of the year, and I write that off too (see IRS Pub 535). Everyone’s an entrepreneur!
So, if you haven't done so already, take a look at what you like to do, what you are good at, and/or what you spend your time doing for fun, then add it to your entrepreneurial menu of businesses. I'm not suggesting that you pretend to be in business, but rather, that you actually make a decision to be in business for yourself and get educated about the tax benefits.
Most businesses do not require a license or a tax ID number, but check with your local government for registration or permit requirements. In order for your business to be recognized as a business and not a hobby by the IRS, you must have the intent to make a profit (you can have a loss), and you must run your business like a business by keeping good records. When you get a receipt, write this on the back: who was involved, what you discussed (if it was a dinner meeting), where you were, how much you spent (because receipts fade) and when the event took place. You don’t need a receipt for expenses under $75 (unless it’s for a hotel room), but I suggest you keep them all anyway. Plus, you should keep a small “tax diary” to record your daily business expense notes and mileage. And of course, meet with your tax professional to discuss your options and how they impact you personally.
Some say this is hard work, but so is being broke! It takes a lot of mental energy when you spend your time robbing Peter to pay Paul. So, do the work and remember my mantra — it's always business. And here’s the best part: my business actually grows as a result. I keep impeccable records just in case I'm ever audited by the IRS; I get to interact with people and have a good time; and I get my money back during tax season. Now that makes dollars and sense!
For more information on tax rules and regulations, visit IRS.gov.