We’ve all been told the old saying “you can’t have it both ways” at some point in our lives and in most cases it’s probably very true. Yet, there’s a way to create wealth accelerators and get tax deductions for doing so.
In fact, I would say that in the scenario where you are a W2 employee that is VERY true.
The financial benefits of business deductions as wealth accelerators
Take for an example when you purchase a vehicle as transportation to get you to and from work. You take out a loan and pay for it each and every month.
It comes out of your net household income and is a true expense to you. As concerning, you are also invariably paying interest on the vehicle payment as well as insurance, let alone the gas you have to pay for. All of these are included as net expenses coming out of your individual bottom line.
However, what if you could actually take those same costs for owning and operating that vehicle ‘out of’ your gross income before you paid taxes?
Effectively you could look at it as being incentivized at some level to having to own and operate a vehicle for the creation of income.
Why I say this is that because of those deductions for the vehicle, you are essentially saving money that you’re not getting taxed on from your gross salary. Now here’s a no-brainer, if given the chance to be able to deduct vehicle expenses and pay less taxes I can only imagine 100% of us are going to choose that option.
The government is incentivizing you to create wealth accelerators
One of the greatest, if not THE greatest, advantages to incorporating your life by creating a business is the ability to deduct legitimate business expenses from your gross income. Essentially, the federal government is making sure that you have enough funding available to continue to operate your system that creates income for you and your family. It’s a downright beautiful thing!
Coming right off of the IRS’s official website www.IRS.gov they classify a business expense as follows:
To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary. (IRS.gov)
Good to know, right? It gets even better. Here’s what the IRS says about being able to consider some expenses as business expenses even when they might otherwise be split between a personal use and a business use:
Generally, you cannot deduct personal, living, or family expenses. However, if you have an expense for something that is used partly for business and partly for personal purposes, divide the total cost between the business and personal parts. You can deduct the business part. (IRS.gov)
I address different types of wealth accelerators such as businesses and real estate in the following post https://thefinancialstoic.com/?p=321
Deduct expenses that might otherwise be personal expenses in some cases
The incredible news here is that if you were simply to incorporate a business activity and legitimately earn income from that activity, you stand to be able to deduct a lot of expenses otherwise that would be personal expenses and that would come right out of your personal net income.
The big expenses in this category are vehicle expenses, cell phones, internet and communication expenses, and even prorated office space within your house. Obviously without the ‘coverage’ that your business activity creates you would be incurring these costs as straight line expenses and right out of your personal income, ‘after’ taxes.
I like to talk a lot about my friend Sheri who notoriously set up a business to essentially be able to enjoy her ‘toys’ and have the government ‘help’ pay for them.
As an outdoor guide, she was able to purchase a few snowmobiles, kayaks, canoes and a host of other ‘fun’ items, even a float plane, and deduct these expenses as part of her legitimate expenses operating a business.
It just so happens that the equipment needed to operate her business are able to provide a serious level of entertainment value to her and most people.
How about getting deductions for things you’d do for fun?
So if you were compelled to operate a side hustle or go into business to accelerate your financial independence, how would you like to take advantage of the current tax code that gives advantages to business owners?
Of course you would! What if these tax advantages were able to give you a tax break for items you currently are paying full price for out of your personal net income, would this be even more compelling? I think it might be.
A great example are the business deductions for things like automobiles, office space and telecommunication costs. Costs that all of us have and pay for completely out of our personal after tax net income.
The following has been directly lifted from the official IRS website:
Motor vehicles
You usually capitalize the cost of a motor vehicle you use in your business. You can recover its cost through annual deductions for depreciation.
Effectively, the federal government in the United States is ‘incentivizing’ you to buy a vehicle provided that it is put into use generating income for you though a business.
For businesses that require a vehicle as a primary part of generating this income, as would a 4X4 truck in the example of an outdoor guide business, this ability to deduct a prorated portion annually through gained business income is an INCREDIBLE thing. Especially since you’d be paying 100% for this same vehicle through after tax income if it was a straight out personal purchase.
Take for example a ‘famous’ YouTuber that operates a YouTube business promoting high performance and luxury cars. The current Ferrari that he drives and features in his YouTube videos is owned by his incorporated business entity and he is able to take an annual deduction for its depreciation against his business’ income. So if you think about it, he is kind of being paid to drive a Ferrari!
Business as a force multiplier
Too many people undervalue the wealth force multiplier that is provided by starting and operating a business, even if it’s ‘just’ a side hustle.
I have entrepreneurs apologize to me all the time telling me that they’re “sorry that they’re idea isn’t a million dollar business idea”. I stop them every time and ask them if they’d say ‘no’ to making $100,000 a year from their business?
“Of course not” is usually the answer. My point to them is that being a ‘thousandaire’ is something that literally is life changing.
Conclusion
To that end, receiving the additional tax advantages provided by being able to deduct certain business expense is also a wealth force multiplier.
One particular strategy that can be a substantial wealth preserver and accelerator is developing a business whereby you can at least deduct a portion of your home office expenses, cell phone, internet and vehicle. Obviously these are some of the more significant monthly expenses that each of us has.
Although I’m sure we’d all rather enjoy being paid to drive a Ferrari, I suspect that each of us also wouldn’t mind being a ‘hundred thousandaire’ and having some of our largest monthly personal expenses being deducted as expenses against our business income.
