I wanted to start this essay on the positive benefits of defining your business first before building any online sites, blogs or special projects. (Note: this article is primarily focused of those living in the US - but, you may find some benefits in other countries as well).
What many people tend to forget is that there is a significant tax incentive in this country if you define your online work as a business. This is much easier than you think and should be your primary focus before doing anything else. If you haven't started this activity I would strongly suggest taking a look at the rest of this article!
By no means am I a lawyer or an accountant - but, I can give you the basics from what I have learned. The core lesson I want you to get out this is that by declaring yourself as a business, any purchases, costs, fees, etc. can potentially be deductions on your taxes if your business is at a loss for the first year or more. This includes any equipment you may purchase dedicated to your online work. Granted, if you make a lot of money then you will be taxed - however, the expenses you have for your business will reduce that profits such that the tax impact won't be as great.
How does this work? First, there are three basic forms of a business you can setup in order to do this - Sole Proprietor, LLC, or Corporation. I'm going to focus on the Sole Proprietor for now because it is the easiest and cheapest way to get started - you can do the research online for more information regarding LLCs and Corporations.
A Sole Proprietor simply means a business entity that has no separation from you, the individual. However, it is still a business - thus, even though the business debts and profits flow through to you, the accounting and tax advantages are still separate. It is a simple way to have a trade name for yourself while using basic accounting expenses and profits.
Setting up a SP is typically very easy in any state. Although the rules tend to differ slightly state to state the basic steps are:
1. Find a name for your business - I recommend a generic end expression such as Enterprises, Services, Systems, Productions, Adventures, etc. For example, you might pick Smith Enterprises. I like to recommend this only because your primary business focus may change.
2. Register your new name with your state - this is defined as running your business under an assumed name. There typically is a small registration fee of $10-$35 and a very easy form to fill out. Check your state's Secretary of State website to find out what you need to do.
3. Publish your assumed name - Some states require you to publish your assumed name in a local city newspaper showing your intent to do business under that name. This will only cost you $10-$20 (this only has to be in your small suburban paper - not, a major city paper.)
4. Get a Federal Tax ID - Once your name is approved by the state, get a Federal Tax ID so you don't have to use your SSN for receiving income (this is free).
5. Get a checking account and a credit card under your business name. It will have both your assumed name and your own name on the accounts. You should use these from now on for any business transactions.
That's it!! Now you can do business under your new business name, purchase equipment, supplies and training all as part of that name. For example, once my business was setup I specifically purchased a laptop devoted only to my online work. I never install or use personal software on this laptop - business only. That capital expense was not only deductible on my taxes, it is also something that depreciates in value over time which may be deductible in the future as well.
Any general expenses can be deducted against your profits as well such as printer paper, fees, training, traveling, disks for backups, advertising, etc. Using a tax accountant is advisable to understand the additional forms you must complete at tax time.
To keep track simply pick up a copy of Quicken and create three accounts for each year:
1. Cash Expense Account - for general expenses
2. Capital Expense Account - for office equipment, computers, peripherals, etc.
3. Income Account - for any income from your affiliate accounts, ebooks, special offers, etc. - all the ways you make money online.
Just keep track of everything in those accounts for each year. Use these to help you categorize your finances at tax time.
One final note of warning - as a sole proprietor you are still personally liable for any legal actions. It does not protect you or your income as a corporation would. Always consult a lawyer to find out more about your own liabilities. Nevertheless, becoming a sole proprietor is much better than just using your own name and SSN!
What many people tend to forget is that there is a significant tax incentive in this country if you define your online work as a business. This is much easier than you think and should be your primary focus before doing anything else. If you haven't started this activity I would strongly suggest taking a look at the rest of this article!By no means am I a lawyer or an accountant - but, I can give you the basics from what I have learned. The core lesson I want you to get out this is that by declaring yourself as a business, any purchases, costs, fees, etc. can potentially be deductions on your taxes if your business is at a loss for the first year or more. This includes any equipment you may purchase dedicated to your online work. Granted, if you make a lot of money then you will be taxed - however, the expenses you have for your business will reduce that profits such that the tax impact won't be as great.
How does this work? First, there are three basic forms of a business you can setup in order to do this - Sole Proprietor, LLC, or Corporation. I'm going to focus on the Sole Proprietor for now because it is the easiest and cheapest way to get started - you can do the research online for more information regarding LLCs and Corporations.
A Sole Proprietor simply means a business entity that has no separation from you, the individual. However, it is still a business - thus, even though the business debts and profits flow through to you, the accounting and tax advantages are still separate. It is a simple way to have a trade name for yourself while using basic accounting expenses and profits.
Setting up a SP is typically very easy in any state. Although the rules tend to differ slightly state to state the basic steps are:
1. Find a name for your business - I recommend a generic end expression such as Enterprises, Services, Systems, Productions, Adventures, etc. For example, you might pick Smith Enterprises. I like to recommend this only because your primary business focus may change.
2. Register your new name with your state - this is defined as running your business under an assumed name. There typically is a small registration fee of $10-$35 and a very easy form to fill out. Check your state's Secretary of State website to find out what you need to do.
3. Publish your assumed name - Some states require you to publish your assumed name in a local city newspaper showing your intent to do business under that name. This will only cost you $10-$20 (this only has to be in your small suburban paper - not, a major city paper.)
4. Get a Federal Tax ID - Once your name is approved by the state, get a Federal Tax ID so you don't have to use your SSN for receiving income (this is free).
5. Get a checking account and a credit card under your business name. It will have both your assumed name and your own name on the accounts. You should use these from now on for any business transactions.
That's it!! Now you can do business under your new business name, purchase equipment, supplies and training all as part of that name. For example, once my business was setup I specifically purchased a laptop devoted only to my online work. I never install or use personal software on this laptop - business only. That capital expense was not only deductible on my taxes, it is also something that depreciates in value over time which may be deductible in the future as well.
Any general expenses can be deducted against your profits as well such as printer paper, fees, training, traveling, disks for backups, advertising, etc. Using a tax accountant is advisable to understand the additional forms you must complete at tax time.
To keep track simply pick up a copy of Quicken and create three accounts for each year:
1. Cash Expense Account - for general expenses
2. Capital Expense Account - for office equipment, computers, peripherals, etc.
3. Income Account - for any income from your affiliate accounts, ebooks, special offers, etc. - all the ways you make money online.
Just keep track of everything in those accounts for each year. Use these to help you categorize your finances at tax time.
One final note of warning - as a sole proprietor you are still personally liable for any legal actions. It does not protect you or your income as a corporation would. Always consult a lawyer to find out more about your own liabilities. Nevertheless, becoming a sole proprietor is much better than just using your own name and SSN!
{0 comments}:
Post a Comment