WHY YOU SHOULD START A BUSINESS
When you are starting a new business there are so many things to think about and so much varied advice that comes from different sources. Some people think the first thing you have to do is register a business entity like a corporation or an LLC with the State Department of Commerce and Consumer Affairs. Others believe the first thing to do is make a logo, business cards, and a website. Still others say you must start with a business plan. All of these steps are extremely helpful when starting a business and should be well thought out. However, when do you actually have a business? It’s when you have your first sale! No matter how beautifully designed your website is, and whether or not you’ve registered a business entity with the State, if no money ever comes in the door, you don’t have a viable business. On the other hand, even if you don’t have a website and haven’t registered anything with the State, if you can consistently make profitable sales, Congratulations! You have a business!
It sounds so complicated, that a lot of people get frustrated, throw their hands up in the air, and say forget it! Here’s why I believe almost every American should have a business: Taxes are by far the biggest expense that most of us will ever have throughout our life. There are legal tax deductions that anyone can take if their expenses exceed the standard deduction that’s allowed to us under the tax code. But the tax code is weighted heavily in favor of business owners. There are expenses that we already incur in our personal lives that could legally be subsidized by the government in the form of reduced taxes owed if those expenses could also be legitimate business expenses.
If you only work as an employee and make a salary paid under a W-2 for tax purposes, you earn your salary, pay taxes on the salary earned, and then live on the remaining income. For example, if you make $50,000 gross salary per year as a single person living in Hawaii, between the federal and state income tax, social security and medicare taxes, you would owe $12,651.17, or a little more than 25% of your earnings. You would have $37,348.83 to live on after paying taxes.
Now, let’s say you already spend $125/month on a cell phone, need a new computer, have a room in your home set aside as a home office, buy snacks like yogurt, granola bars, and coffee for your home office, and spend money to have and maintain a car. These are just a few of the expenses that you might already be incurring that can be deducted for tax purposes.
If you made $50,000 as a business owner, your business could pay for the cell phone bill, office snacks, and new computer. In addition, you can take a mileage deduction of $0.57 for every mile you drive for business purposes (perhaps 20 miles per day), and take a depreciation deduction for the portion of your home used exclusively as an office (let’s say it’s 25% of the square footage in your home worth $600,000). All of the above expenses and deductions can really add up: Cell phone $1,500; New Macbook laptop computer $2,000; Office snacks $600; Mileage $2,850; Home office $3,846; plus 25% of utilities $600. Total business deductible expenses equals $11,396. Now there are other deductions that might apply to you as well, but these are just some common ones that you might be spending money on anyway—not additional expenses to your life.
In this example, we’d take away the $11,396 in expenses from $50,000 to arrive at $38,604 of income. Total taxes would be $8,946.92 saving you about $3,700 in taxes that year.
The best part about all this is that it doesn’t have to be all or nothing. You don’t have to quit your day job. Even if you started a part time business bringing in $12,000/year, and reduced your salaried work hours so that you brought in only $38,000 from your day job (still $50,000 total), you could still write off most of that $12,000 and benefit in this same way leaving you with an extra $3,700 to spend any way you want.
Next month I’ll write about how to select the right business entity for your business.
OKURA & ASSOCIATES, 2015
Honolulu Office (808) 593-8885
Hilo Office (808) 935-3344
Ethan R. Okura received his Doctor of Jurisprudence Degree from Columbia University in 2002. He specializes in Estate Planning to protect assets from nursing home costs, probate, estate taxes, and creditors.
This column is for general information only. The facts of your case may change the advice given. Do not rely on the information in this column without consulting an estate planning specialist.