starting my firm out of my house. I worked 10 hours a day to make contacts and build my practice. It took me nine months just to get my first four clients. Since then, I’ve never looked back. I’ve never been happier in my work. And I’ve never paid less in taxes.
I’m not suggesting you get fired or quit your job. But I am suggesting that you probably have a set of marketable skills that you could use to start your own business. Start part-time. Set aside a room in your house for your business. Don’t spend money on a nice office and lots of advertising. Just start small and think big. Think about the freedom that will come when you can devote most, if not all, of your time to your business, your investments, and your family.
And it all starts with good tax planning. When you start a business, your options for deductible expenses skyrocket. And making most of your expenses deductible is easy—make sure that when you spend money your intention is to make even more money. The U.S. tax law calls this having a business purpose for your expenses.
When you start a business, your options for deductible expenses skyrocket. And making most of your expenses deductible is easy—make sure that when you spend money your intention is to make even more money.
Then, be careful with your money. Don’t spend money on stupid stuff. Spend it on things that will likely grow your business. Spend it on things that other people in your business might buy. This is called making expenditures that are ordinary in your line of business. Make your expenses count. Make them work for you. When you do that, your expenses become necessary. And when your expenses are necessary, voilà, they’re deductible.
Become an Active Investor
Now let’s suppose that you don’t want to start a business but you still want to be a super taxpayer. What do you do? You become an investor. Remember that the right side of the CASHFLOW Quadrant includes both business owners and investors. But there’s one catch; you can’t be a typical investor if you’re going to enjoy the tax benefits of investing. You have to become an active investor. That means you have to be an investor who actively invests for passive income, not earned income. Very simply, passive income is income that comes from dividends, rents, and business. It’s taxed at a much lower rate than earned income, which comes from appreciation and capital gains, or from your paycheck. In order to become a super investor, you must find good, cash-flowing investments that produce passive income. A great book to read on this topic is the book Robert Kiyosaki and I wrote together, Why the Rich Are Getting Richer. (Plata Publishing, 2017)
Becoming an active investor is actually quite simple. Just as with becoming an entrepreneur, it all starts with your financial education.
You might be thinking that becoming an active investor sounds hard. It’s not. Becoming an active investor is actually quite simple. Just as with becoming an entrepreneur, it all starts with your financial education. You don’t need a four-year degree in finance. You don’t even need a two-year degree, but you do need to take some courses in the type of investing you think you might enjoy. Don’t know what you might like? Take a variety of courses on a variety of investments. Take a course in real estate. Take a course in stock investing. And take a course in business investing. You never know what you’ll like until you learn about it. A great resource for becoming an active investor is educational programs offered by The Rich Dad Company. Learn more at www.WealthAbility.com.
Once you have an idea of what type of investing you want to do, find a mentor or coach to help you with your investing. Then simply start investing. Just as I advised with starting a business, start small. Do one small real estate deal, a couple of small stock market trades, or make a small investment in a private company. You don’t have to risk a lot of time and money. And along the way, so long as you keep track of all of your education and investment expenses, and your tax preparer reports them properly, you should be able to deduct some or all of these expenses on your tax return.
The Passive Investor
There is one other type of super taxpayer. That’s the passive investor. And no, I’m not talking about the typical investor who invests in the stock market through a mutual fund or an exchange-traded fund (ETF). I’m talking about someone who invests their money with an active investor who is working directly in a business, real estate, agriculture or energy—the tax-preferred types of investments. Passive investors also enjoy the benefit of deducting many of their expenses. With the right tax strategy, they can even deduct losses from the investment against income they earn from other sources.
The key to good passive investing is a good team.
The key to good passive investing is a good team. You need a great investment advisor and a stellar tax advisor, as well as a good lawyer and a knowledgeable banker. All of these team members need to work together to make sure your best interests are met. I’ve found the best way to get team members to work well together is to hire a wealth strategist. This can be one of the advisors on the team or a separate strategist altogether. The strategist can work to maintain the relationships between you and the other team members.
In many countries, only certain individuals are allowed to be passive investors. In the United States, these individuals are called “accredited investors.” Accredited investors meet certain minimum wealth and earning guidelines set up by the government. In Australia these are called “sophisticated investors” or “professional investors.” There are always minimum wealth requirements and in some countries, there are additional certification rules. The thinking is that if you have enough money, you either have a high enough financial education to properly evaluate a deal or you can afford to lose some of your money. Either way, you qualify under the government guidelines for becoming a passive investor.
While the losses and expenses of a passive investor can be deductible, the rules can be a little tricky. If you’re thinking of going this route, be sure to sit down with your tax advisor and let him or her know what you are planning so that he or she can explain the rules to you and make sure you get the benefit of your expenses and losses.
| Don’t Be Cheap with Your Team Members | |
| 1. | You often get what you pay for with team members. |
| 2. | Low fees don’t translate into a good deal when it comes to advisors. A good team member is worth their weight in gold. |
Document Everything
The last key to becoming a super taxpayer is documentation.
The last key to becoming a super taxpayer is excellent documentation. All good tax planning also leads to sound business and investment decisions. One of the best business or investment decisions you can make is to keep good documentation of your income and expenses. This means that you keep accurate books and records. Make sure your bookkeeping is up to date at least once each week. The more thorough and accurate your accounting, the better business and investment decisions you’ll make, and the less likelihood you will have difficulties in an audit.
| TAX TIP: |
Document. Document. Document. The IRS, Revenue Canada, the HMRC, ATO, and
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