Having your own business is still the best “tax shelter” around if you set things up right.
And the trick to “doing it right,” is to make “pleasure your business.”
You see, you have a choice. You can be a photographer hobbyist — shooting just for fun — and, as you probably know, blow through a whole bunch of money. Or, you can go pro and let the government subsidize your fun by converting that expense into a tax deduction.
Let’s take a look at the effect…
Let’s say you want to purchase a piece of equipment that costs $1,000 and your federal, social security, state, and local taxes add up to 30%.
That means you’ll need to earn $1,428.57 in order to net $1,000 of spendable cash.
If the purchase qualifies as a business deduction, however, you only need to make $1,000 because the deduction cancels out the income. In essence you just saved $428.57 and received a 43% discount on your purchase.
A nice deal, but that’s not the end of the benefits...
You can also deduct business use of your vehicle with your choices of method — you can choose to calculate the deduction based on actual expenses (including depreciation) or by multiplying the number of business miles by the standard mileage rate which is 56 cents as of this writing.
This adds up. If you drive 1000 miles for business, you can deduct $560. The key to successfully taking this deduction is to keep a log in your vehicle and record your business mileage.
If you work from home, you may also be able to take deductions for use of your home. This includes some expenses you would have to pay anyway like electric, heat, and repairs. So this is like getting free money. If you qualify for a home deduction, you can deduct depreciation as well.
There are deductions available for educational expenses, too. This can greatly reduce the cost of learning.
Basically, anything that contributes to the production of income can qualify for a deduction. You simply need to train yourself to look at your expenses in that way so you don’t miss out on what is rightfully and legally deductible.
And remember, little things add up — pens, ink jet supplies… I think you the idea. The key is to keep good records.
Of course none of this is available to you until you get started in business. You don’t have to make an immediate profit, but you do need to get started.
I’ve heard tax advisers say that everyone should have some kind of business just for the tax benefits. I don’t quite agree with that — there are much better reasons for starting a business — but the ability to make money doing something you like, and have it be “deductible” too, is a very sweet deal!
P.S. and the necessary disclaimer — Tax laws can be complicated and they change. You will either need to do your own research, get a tax adviser, or use software that can help you get the deductions you’re legally entitled to. Keep in mind that “Jeff said it was OK” will not get you out of trouble with the IRS!
Official IRS Web Site — a great source of tax information direct for the source
The Not Your Normal Photography Business Success Course (you need to get started to take advantage of business deductions!)