this chapter), think about your business as if it were one of the big dogs, such as IBM or Microsoft. Think about all of the good reporting they need to do in order to stay in business and to keep investors, bankers and management informed about what’s going on. You can do the same with your small, start-up business that you run out of your home office. When you do, chances are the IRS, CRA, or other tax officials will be in and out of your life quickly and painlessly if you’re ever audited. You’ll also have accurate financial information to help you to make wise and informed business and investment decisions. Best of all, your expenses will be deductible, and you won’t have to worry about whether the government will allow them. Why? Because you’ve followed the law exactly as it was meant to be applied.
The result will be lower taxes and less stress. So now you know what I mean when I say that almost every expense can be deductible under the right circumstances. Every time you spend money you can also reduce your taxes, whether it’s filling up your car at the gas station, going out to dinner with your spouse and business partner, or even going to New Mexico to look at real estate.
The basic difference between an average taxpayer and a super taxpayer is how serious they are about increasing their wealth. An average taxpayer turns his or her money over to someone else and hopes and prays that their investments go up in value. The super taxpayer is actively involved in creating wealth, either through actively investing in a business, real estate or the stock market or through actively seeking out active investors who will do that for them. Super taxpayers also build a great team of advisors, mentors and other relationships who actively help them build their wealth and reduce their taxes. Here’s a chart illustrating the basic difference between an average taxpayer and a super taxpayer. Pretty simple, isn’t it?
Next, we’re going to look at the king of all deductions, depreciation.
| CHAPTER 6: KEY POINTS | |
| 1. | Most people are average taxpayers who only experience average tax benefits. |
| 2. | The key to saving more in taxes is becoming a super taxpayer and enjoying the benefits of deductible expenses. |
| 3. | The best way to enjoy deductible expenses is to start a business or to start investing for passive income. You don’t have to quit your job. Just start small. |
| 4. | One of the best business and investing practices is to document your income and expenses, and to document them well. |
Tax Strategy #6 – Document, Document, Document
Being able to immediately provide documentation upon request during an audit is always an impressive tactic. If your activities and expenses are properly documented, then the tax collector will have a hard time making a case for any changes. Plus, having your documentation in place reduces the amount of time your CPA bills you for an audit. Documentation is a successful defense strategy that enables you to always be ready for an audit and reduces the associated costs. Documentation of receipts has been made a lot easier with computers. Now, you can scan your receipts into your computer. This way, you don’t have to have a file drawer just for receipts and you don’t have to worry about them fading over time. Have you ever pulled out a credit card receipt that was a year or two old, only to find a blank piece of paper? This happens all the time. What if you were being audited and went to pull those receipts only to find they were all just blank pieces of paper. Be sure to scan the receipts into a file on your computer. The IRS loves it when they can just look at scanned receipts instead of going through faded paper receipts.
You will learn more about documentation in Chapter 22 when we talk about IRS audits. Just remember that this is one tax strategy you can do every day, and it doesn’t take much time or effort.
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