Author Topic: Side Hustle and tax planning  (Read 2425 times)

mousebandit

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Side Hustle and tax planning
« on: May 30, 2016, 04:06:56 PM »
For those of you with side hustles that are self-employed or home-based businesses:  how do you structure your business and how aggressive are you with the tax planning and structuring expenses for tax deductions / credits? 

What's your personal feeling on when a tax strategy crosses the line into tax scam (from an ethical point of view, not necessarily legal)? 

I have always been one to read about aggressive tax structuring and thought it was great - working the system.  I am gathering from posts here that the MMM community as a whole views most any tax structuring as scammy, at least over and above the basic retirement-account planning and strategies.  So I am open to re-thinking my views, but wanting input from the entrepreneurs specifically - not just the employee side of the community. 

THANKS!
MouseBandit

Syonyk

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Re: Side Hustle and tax planning
« Reply #1 on: May 30, 2016, 07:35:04 PM »
Structuring expenses?  Do I need to learn a new trick here?

I make extra money doing things on the side, keep track of my business expenses and income, and report it as self employed income at the end of the year on my taxes.

Generally, things I purchase are either "personal" or "hobby/work" (my hobbies tend to generate income, so I put major purchases there into the business category).  I wouldn't put an RC helicopter or something as a work expense, but electronics gear tends to get counted as business, because I use it for income generating activities or hope to.

Though I'm not as aggressive as I could be there.  I tend to ignore small purchases, and ignore small bits of income, so the two balance out in the end.

It's a bit easier now - I have a dedicated building for work stuff, so pretty much anything that goes out there gets counted as a business expenses on taxes.

mousebandit

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Re: Side Hustle and tax planning
« Reply #2 on: May 30, 2016, 08:58:28 PM »
SYONYK - that is cool!  Do you do the home office deduction for your business taxes?  Do you file the Schedule C? 

Structuring for deductions is, as far as I understand it, thinking through your anticipated expenses, and setting up your business structure so that you can deduct them as business expenses.   One of the things I'm thinking of for us, is health insurance premiums.  At this point, we pay for husband's health insurance premiums out of pocket, not pre-tax.  Next year we may be paying for the entire family (6 of us) out of pocket.  If he we had a home-based business, he could deduct the monthly premiums as a business expense (I think).  So that might be a big difference for us.  Another "structuring" would be including both of us as owners on the home-based business, and ensuring that if we go out to dinner or travel, we are talking and conducting business, so it's tax-deductible expense.  Etc.  Another structuring would be, if you drive a vehicle, to route your business errands in such a way that you can accomplish personal errands en-route, and claim mileage deduction for the trip as a business expense.  Stuff like that. 

In the circles I've run in (non-mustachian, not very financially literate, I'll admit!) this has all been very common thinking.  On the boards here, it seems to be considered more towards the unethical side.  That's why I'm trying to get a feel for what the other small-business folks here are doing.  Seeing if these are overall bad ideas, coming from my broke friends, LOL, or if they're still good ideas, just underutilized or not known of by the MMM-salaried crowd.  :-)

MouseBandit

Goldielocks

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Re: Side Hustle and tax planning
« Reply #3 on: May 30, 2016, 10:38:05 PM »
It is never a scam to pay the taxes you owe, but to arrange your taxes to owe the minimum legally possible.

So,  no lying or false representation.   Be as honest (and frugal) as you can.

Know the basic tax code for deductions -- e.g., home use for business is a tricky one, and many try to just use an expense deduction guideline of "if I don't claim more than 20% (or whatever), audits are rare" instead of actually calculating their TRUE 16% or 8%, or whatever... 


For me, I am a sole proprietorship while I have net losses, and will look into a limited partnership or corporation (after 60k).  Corporations have higher tax rates, generally, but many expenses are value and opportunity to defer or avoid capital gains, involve family,  as the business grows.

woopwoop

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Re: Side Hustle and tax planning
« Reply #4 on: May 30, 2016, 10:58:34 PM »
Structuring for deductions is, as far as I understand it, thinking through your anticipated expenses, and setting up your business structure so that you can deduct them as business expenses.   One of the things I'm thinking of for us, is health insurance premiums.  At this point, we pay for husband's health insurance premiums out of pocket, not pre-tax.  Next year we may be paying for the entire family (6 of us) out of pocket.  If he we had a home-based business, he could deduct the monthly premiums as a business expense (I think).  So that might be a big difference for us. 
From what I know, you can easily deduct health insurance as a self employed person, incorporating doesn't do anything there to make it more worthwhile.

Quote
Another "structuring" would be including both of us as owners on the home-based business, and ensuring that if we go out to dinner or travel, we are talking and conducting business, so it's tax-deductible expense.  Etc.  Another structuring would be, if you drive a vehicle, to route your business errands in such a way that you can accomplish personal errands en-route, and claim mileage deduction for the trip as a business expense.  Stuff like that. 
Same with this. You can deduct all of these expenses as a self-employed person already, if it's worth it to you to log every business errand and meal. It's not worth it to me to figure out most of the little stuff, as it would literally be less than minimum wage to tally up all the tiny expenses, especially since I pay a tax person at the end of the year and it would take him more time/money to tote up the deductions than they would be worth. Mileage deduction? I don't want to even think about having another thing to worry about documenting, especially with the low mileage we do on our cars. I do deduct large travel expenses that have legitimate business use and use the standard home office deduction.

I guess I don't know what you mean by "structuring" your business - most of the deductible things you can claim are independent of what kind of business structure you have. I suppose I could claim a few meals out with my husband as deductible "meetings" but to me that's more hassle than it's worth to keep track of. Maybe if we went out to more expensive dinners it would be worth it ;) We incorporated last year to avoid some of the taxes you hit at larger incomes, but we'll be closing the company this year to simplify back down as we get closer to ER.

csprof

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Re: Side Hustle and tax planning
« Reply #5 on: May 30, 2016, 11:53:39 PM »
It is never a scam to pay the taxes you owe, but to arrange your taxes to owe the minimum legally possible.

So,  no lying or false representation.   Be as honest (and frugal) as you can.

Know the basic tax code for deductions -- e.g., home use for business is a tricky one, and many try to just use an expense deduction guideline of "if I don't claim more than 20% (or whatever), audits are rare" instead of actually calculating their TRUE 16% or 8%, or whatever... 


For me, I am a sole proprietorship while I have net losses, and will look into a limited partnership or corporation (after 60k).  Corporations have higher tax rates, generally, but many expenses are value and opportunity to defer or avoid capital gains, involve family,  as the business grows.

+This.  I do whatever my accountant says to do -- when I had a small server farm in my basement, in addition to my home office in a room, I measured both quite carefully and took photos to document the business use, because it was taking up an unusually large amount of space in my house for a home office.  I also threw a power meter on it to accurately be able to deduct the fraction of the electrical bill, etc.  Most years I don't go to that extreme, and just use the ft^2 of my home office and a proportional share of the utilities, which said accountant is happy with.

In my view, there's no ethics here for the majority of us non-billionaires, just the law.  Don't mess with the law.  But deduct everything you legally can -- your competitors are, so why put yourself at a disadvantage? 

mousebandit

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Re: Side Hustle and tax planning
« Reply #6 on: May 30, 2016, 11:57:17 PM »
Thank you guys!  That is what I was hoping to hear.  I'll be looking into the self-employment insurance tax deduction information next.  :-) 

MouseBandit

csprof

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Re: Side Hustle and tax planning
« Reply #7 on: May 31, 2016, 12:18:48 AM »
Oh, but one jumped out:

Quote
Another "structuring" would be including both of us as owners on the home-based business, and ensuring that if we go out to dinner or travel, we are talking and conducting business, so it's tax-deductible expense.  Etc

But just noted:  be careful with this one.  IANAA, and IANAL, and don't take advise from random strangers on the Internet, but for the love of the IRS, please talk to your accountant before deducting meals that are just you and your spouse.

mousebandit

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Re: Side Hustle and tax planning
« Reply #8 on: May 31, 2016, 12:51:46 AM »
Copy that, CSPROF!  Thanks! 

MouseBandit