Home Business Magazine August 2012 : Page 40
MONEY CORNER The Winning Game Plan for Your Home-Based Business Financial Keys that Apply To All Businesses for Success By Greg Crabtree, CPA W hether your home-based business is by choice or necessity, you need to focus on three keys to have a winning game plan: 1. Define what success looks like. 2. Choose simplicity for organization structure. 3. Count the cost by paying vendors and taxes before you take money out of the business. As the owner, you get to make the initial decisions on how things will work. However, you have to understand that the IRS defines tax implications, and “business physics” will define your economic outcome, so choose your course wisely! It is expensive to “ argue your point with the IRS if you do not meet the guidelines, so your argument had better be valid and worth it! ” DEFINING SUCCESS Passion Over Profit – These are entrepreneurs that love the idea of a product or service they have personally experienced, and they want to share it with all of the people they know. It is great to have passion, but you will need profits to make the business sustainable unless you like working for free and have other sources of funds to keep plowing into the business. The IRS may have something to say about whether losses will be deductible if you fail to meet the general rule of profits 2 out of 5 years. It is expensive to argue your point with the IRS if you do not meet the guidelines, so your argument had better be valid and worth it! Profit To Support Family – With current unemployment rates, there are record numbers of home businesses being formed. 40 Home Business ® While it does provide a great opportunity to be your own boss, you still need to treat it like any business start-up and follow sound business principles. The early stage will be to make a profit to replace your wages. As we will The IRS defines tax implications, and “business physics” will cover later, the profits define your economic outcome, so choose your course wisely! you hope to live on will sometimes be in conflict with other expenses remote, it is not worth the additional cost. that the business needs to pay. This will add Limited Liability Company – Should to the complexity of managing cash flows you need some liability protection or you as you and the business compete for use of have more than one owner, this should be the same dollar. As you gain stability and your next option to consider. Most home success, you can make your market wage businesses do not have employees or may plus make a profit on top of that. use contractors for spot help. An LLC Tax Write-Off Business – This is the taxes you just like a sole proprietorship business I recommend staying away from. by having you pay income tax and self-You probably heard someone on the radio employment tax on your profits from the telling you how you could deduct these business (whether you take the money out expenses to not pay taxes. Repeat after me, or not). As long as your profits are less than “To spend a dollar to save 15 to 35 cents a market-based wage for you, it helps you in tax is dumb!” Deduct the legitimate not have to deal with the cost of payroll tax business expenses you spend to produce returns. The downside is many LLC owners your income, but you will never build and Sole Proprietors build up taxes due wealth (without cheating) unless you have before they realize it. Since nothing is being taxable income AND spend less than your withheld from draws they take out to live after tax income to live on. I know this is on, they often have a bad surprise come tax not what you want to hear, but this is how day. See the next section for how to avoid my wealthy clients did it, and they can sleep this problem. The legal documents for an well at night not fearing an audit. LLC are simple if you have one owner, but they get much more complex once you add an owner that is not a spouse. CHOOSE SIMPLICITY FOR ORGANIZATION STRUCTURE: Complex is many times the code word for expensive! Here are the guidelines for home-based businesses to use when you are consulting with your tax advisor: Sole Proprietorship – this is by far the simplest form of doing business. The activity is reported on your personal tax return and does not require a separate tax return to be filed. Since “you” are the business, it does not afford you legal liability protection that a corporation or limited liability company (LLC) does, but many of those liability fears can either be insured against or are so Complex is many “ times the code word for expensive! ” S Corporation – The main complexity with an S corporation is the requirement by the IRS for the owners who work in the business to make a market-based wage. The IRS does not make you take a wage if there are no profits, but they do not want you to avoid payroll taxes by taking low Continued on page 42 | July/August 2012 www. homebusinessmag.com
The Winning Game Plan.
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