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Ajay Kumar, CPA


Can we save money by starting a business

This is the time of the year when a lot of people start thinking about various ways on saving money on their year end taxes. IRS advises taxpayers to follow appropriate guidelines when determining whether an activity is a business or a hobby -- an activity not engaged in for profit (hobby losses/expenses are not tax deductible). One question that I am asked repeatedly is can we save money on taxes by starting a business? so here is the summary of the main tax benefits of having a company.

The government realizes that it takes an investment to start and run a business and allows the self-employed to deduct any work-related expense from their gross income. This means anything from a box of paper clips to an expensive computer system is tax-deductible, if purchased (and used) for business purposes. This notion of business costs being tax-deductible is why people think that the self-employed never pay any taxes, and probably that’s the reason why people who starts a company almost always have more than one.

There are numerous costs of doing business that qualify as deductions. These include, but are not limited, to the following ten:

  • Home Office: If you use a portion of your home to run your business, you may be able to deduct a portion of your rent or mortgage payment, utilities, insurance etc.
  • Vehicle: Even if you personally own your vehicle rather than own it in the name of your small business, you can deduct a portion of your car use, when it is for business purposes.
  • Travel: You may deduct small business trip expenses, such as airfare, transportation, meals, entertainment, hotel stays and other expenses you incur while traveling for your business.
  • Interest: Business interest expense is an amount charged for the use of money you borrowed for business activities.
  • Retirement Plans: Retirement plans are savings plans that offer you tax advantages to set aside money for your own, and your employees', retirement.
  • Rent: Rent is any amount you pay for the use of property you do not own. In general, you can deduct rent as an expense only if the rent is for property you use in your trade or business.
  • Taxes: You can deduct various federal, state, local, and foreign taxes directly attributable to your trade or business as business expenses.
  • Insurance: Generally, you can deduct the ordinary and necessary cost of insurance as a business expense, if it is for your trade, business or profession including the health insurances.
  • Education: You can deduct all business-related seminars, classes, educational tapes or CDs, and convention fees.
  • Repairs: Business repairs and replacements that increase the value of your property, make it more useful, or lengthen its useful life.
While starting a business, be open to new opportunities. Don't let occasional set-backs demoralize you. As someone once told me, "It all looks worse from the inside." Realize that there is no perfection -- there's only ongoing improvement. I would like to emphasize that each household's financial circumstances are different so it's important to fully consider your specific situation and goals before deciding what sort of company you should start.
Ajay Kumar, CPA

 5 Villa Farms Cir;
Monroe Township,
New Jersey 08831, U.S.A.

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