Go for Pre-Tax Dollars
Oct 23rd, 2009 | By admin | Category: TaxOne reason small business owners do better than an employee is they accumulate assets with PRE-tax dollars. When you own a business you enjoy tax loopholes designed to give you an advantage over the wage earner. And when you sell your company you can arrange for it to continue to pay for your health and life insurance and other benefits in PRE-tax dollars by making it part of your sale agreement with the buyer. Why shouldn’t you make an investment in yourself, which will enrich your lifestyle and your finances, by owning a business?
I know we take advantage of this and have several businesses to allow us to take advantage of the tax benefits. We have done importing and this helped us on our taxes and abillity to travel. We have also done travel writing and photography.
If you are careful and work to be legal there are lots of benefits to having a business.
Everyone (in my opinion) should have at least one business or you are working harder on the tax front.
And you can also land a business that takes on a life of its own and starts to provide you with more income.
The tax laws are made to make a business attractive.
As an employee you pay your tax first as you get your pay check….with a company you pay on your net gains which are after your expenses.
Yes, this makes a lot of sense. However, too many owners get carried away. In early October, 2009, the Minneapolis Star Tribune had an article on an owner going to jail for writing off his personal credit card bills, boat storage, swimming pool, decorating and many other personal expenses. Besides, buyers don’t want to wade through all of this to figure out what the true profit might be. And banks tend to get nervous when there are too many “add-backs.”
I like to keep this quote around:
“A taxpayer need not arrange its affairs so as to maximize taxes as long as the transaction has a legitimate business purpose.” — Judge Cornelia G. Kennedy, The Sixth Circuit Court of Appeals, April 20, 1992, aff. of the Tax Court holding in Proctor & Gamble v. Commissioner.
The key here, I believe, is the term “legitimate business purpose.” For myself and my business, I often use a simple test: can I explain the expense to my teenage kids so that they understand it and how it relates to the business? If the expense does not pass this test, I usually look into it a bit deeper before I deduct it …
“loopholes” implies that your trying to get away with something and I think when you look at in that way what your doing is wrong. A line exists at some point between working within the system and taking advantage of the system. There are reasons that our government has seen fit to put in these tax breaks for business owners, but that does not mean they should be taken advantage of.
I wish personal ethics would come into play in the business world a whole lot more. I think we’d all be much better off for it.
I agree with Edward, I’d change the word “loophole” especially since you use the word “designed” right after it. By definition a “loophole” accidentally exists in a poorly designed law.