YOU can save hundreds, even thousands, of income tax dollars - often year after year - by deducting expenses when you have a self-employed sideline or full-time business.
But please resist the very real temptation to deduct nonbusiness expenses.
The general rule is simple: You may deduct some or all of what you spend on most goods and services likely to help you earn income the government can then tax.
There are various exceptions, but always keep in mind this "reasonable expectation of profit" test.
Once you cross the line to "personal expenses," you lose their deductibility.
It's so easy to say, "Oh, I'll just run this through the business." But before you do that, imagine a tax auditor querying that item. How would you justify it as a legitimate business expense?
If there could be any doubt about an item, I always write on the back of the receipt a couple of notes linking it to that "spending money to make money" guideline. After all, it could be several years before the tax office decides to audit you, or even to query a few of your expenses.
If you are challenged, and the tax office decides you deliberately evaded tax by claiming a nondeductible expense, you will have to pay not only the back tax plus interest but probably also a penalty.
On the other hand, don't be timid about deducting expenses that can in some way be linked to your business. There can even be overlapping areas, like claiming expenses for a home office or other parts of your home for business purposes.
For example, if these areas comprise 20 per cent of your home space, you should be able to deduct 20 per cent of maintenance and repair costs, rent or mortgage interest, property insurance premiums and so on. This same approach applies if you rent out part of your home.
But be careful you don't endanger the capital-gains-tax-free status of your principal residence. Check tax office guidelines and perhaps also get expert advice.
Mike Grenby is a columnist and independent personal financial advisor; he'll answer questions in this column as space allows but cannot reply personally - email [email protected].
BE CAREFUL ABOUT WHICH EXPENSES TO DEDUCT:
- Have a businessrelated reason
- Claiming personal expenses can cost you
- Home offices should qualify
