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Are You Ready To Beat The Taxman? Part 2
Alright, so I’m continuing on from yesterday’s post, which is part 1.
Other Write Offs There are some other write offs you can take advantage of, which some are very interesting.
I actually forgot to mention this previously. When you work from home you get to write off a percentage of your mortgage/rent with the amount of space you use. Well, it also includes all the expenses you have. That means heating, electricity, property taxes, water, etc. As you can see that can be a huge benefit. The Interesting Write Offs Surprisingly, there are some odd write offs that you probably wouldn’t expect, but they’re there.
You can seriously write these off if they’re for business purposes. I think in the US, you can write off 100% of a meal. In Canada, you can write off 50% of it. Works the same with entertainment. The key is that it has to be for business purposes. You might take a potential client to a sporting event to sort of entertain them and get their business. I just got my check today, so I’m going to take my mom out for dinner and I will talk to her about marketing opportunities lol. I’ll write 50% of it off. Incorporating Rocks I had to touch on this because it is so important. Here’s the deal though, it’s only good to incorporate when your income starts to get too high. There’s obviously only so much you can write off and you don’t want the taxman to get it. You’ve seen them before…
They’re all essentially the same; they’re a separate legal and taxable entity. This means all corporations (except unlimited liability corporations) have limited liability. This simply means that the liability of the business is what the business legal owns. If your business was sued, they could technically seize what the corporation owns. If you’re still a sole proprietor, you have unlimited liability. That means they don’t sue the business, they sue you. And that means they could take your house, car, etc. It’s up to you to decide on the merit of having limited liability. There’s more paper work and regulations on a corporation, so be aware of that. There are no LLCs in Canada, but I heard in the US you get the limited liability, but you’re taxes as like a sole proprietor if you’re the only stock holder. Which would negate any of the tax benefits I’m going to talk about. Corporations are separate taxable entities This may get confusing, but it really isn’t. When you incorporate, you’ll no longer be earning money and you’ll no longer be self employed. You’ll be majority stock holder in “YOUR BUSINESS INC”. You’re going to be moved into a employee position, if that be Chief Executive Officer (CEO), Chief Financial Officer (CFO), President or whatever. This may all seem like a lot of work, but there is a point to all this that is quite beneficial. The Richest People in America Don’t Earn A lot of Money… Sorta The richest people in America don’t declare a lot of money when they file taxes and the reason is that they keep their money tied up in a corporation, so they artificially lower their taxable income. Let’s say you’re making $150,000 a year. That’s a lot of money, but in Canada you can expect the government to want you to pay near 50% tax on that. Like hell would I give the government 50% of my income each year. If you were a sole proprietor, you’d have to pay $75,000 in taxes. Makes me cringe, really. Let’s investigate what can be done if you’re incorporated. Your Salary How much do you need to make to just pay the bills and have a little left over? Probably not $150,000. Let’s say you could get by fine on $35,000. Well, that’s going to be your salary. I’m just going to use rough numbers and take the example if you live in Alberta. You’ll probably pay about $6000 in personal income tax. There will be an additional $115,000 held by the corporation. That will be taxed(both provincial and federal) at a rate of 14%. That works out to $16,100. That brings up your total tax burden to $22,100. That means you’d save $52,900 in taxes. That’s not chump change. That’s a lot of taxes you can weasel out of. Obviously this is enough benefit for you to incorporate to save money on taxes, but there is more… Why do the rich get richer? The answer is that it is the only way to avoid taxes. Let’s say you’re in the same position with your $35,000 salary. Well, that means your corporation has $115,000 in profits. Why not do something with it, so it can’t be taxed. How about you take $100,000 and put that down on a house? Sounds pretty sweet. You can use that house to rent out to people if you want or do what you want with really. After you put that payment down on the house, you only have $15,000 profit. What is your total tax burden? $6000 in personal income tax and $2100 in business taxes totaling $8100 taxes. That helps you save around $67,000 in taxes, plus you have a $100,000 put down on a house you own. AM I ROCKING YOUR WORLD YET??? Why not rent that house out to yourself? Gasp, what??? You can do that?? Walmart is doing it right now. Walmart doesn’t own any of their buildings or property. They rent it from a corporation that they own. Wouldn’t it be sweet to rent a high quality fully furnished cheap house? If something ever broke down, the corporation would gladly fix it and write if off. The possibilities are endless. The Only Problem As you’ve probably noticed, the benefit is only there when the corporation is controlling the assets. You’re not allowed to spend money, only your salary. Obviously liquidating things and sending $500,000 to yourself is going to require you to pay a boat load of taxes. More Write Offs Yes, there are a few personal write offs you can do and somethings that may help from an incorporated perspective.
For student loans, it depends on where you live. In Canada, I can write off 17% of the interest I’ve paid off on my loan. Not much, but it’s a write off. RRSPs are Registered Retirement Saving Plans and I believe RPP are Retirement Pension Plans. Obviously saving for the future is important to everyone and you get a write off for it. Anyway, in Canada you can contribute a max of 18% of your income in a year. I believe that is a full write off. What you can do is pay yourself the difference in RRSP contributions, so you can max out your RRSPs and reduce taxes. That means instead of paying yourself $35,000 you’ll pay yourself $43,000. That means you put 18% of that in your RRSP, which works out to $7740. That leaves you with just over $35,000 in taxable income. You’re richer, but your taxes don’t change. Obviously it is stuck in an RRSP, but that’ll be for another post. There is also a corporate matching you could do. A lot of businesses will contribute to a retirement plan if you contribute, so that’s more income you can put into retirement without actually having to pay more in taxes. Capital gains are taxable income. That means if you invested a $1000 and sold it for $1200, you have to pay taxes on the gain. I believe in Canada, the taxable income is 50% of the capital gain. In the example, the gain is $200, so the taxable income would be $100. It also works the other way, capital losses. If you lose money, you can write it off. If you put your retirement savings into just a regular investment account you can sell your capital losses and write’em off. It’s a neat way of doing things, especially doing them in December which is the last month of the fiscal year. All you really do is sell your losing stocks and write off the loss, than just reinvest them. From an investing point of view you’re no different, you just get the write off. – That’s enough for now. Damn, that’s another beast of a post. It’s even longer than yesterdays. I’m sure most people are confused as hell, but it’s definitely something worth learning because paying taxes really blows. PS: I didn’t mention dividends. I could probably explain this mathematically, but with the double taxation on them they’re really not worth it. August 27 2008
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