1. Selling Assets: Generally, if you have a garage sale at your home, you will likely have no income that would be subjected to tax. The reason for this is that the likelihood is extremely low that you would have sold any of the assets at that garage sale for more than what you have invested in them for tax purposes. Of course, if you did, you would have to pay taxes on the money made as a result of the sale. You don’t get to deduct the losses you have from these sales; and that’s not unfair when you really think about it. However, whenever you sell an asset such as stocks, an assumption is made that you originally invested in the stock – not to lose money – but to gain money at some time in the foreseeable future. If you were not seeking to obtain a significant number of shares to gain significant control in the company, you probably only wanted to make money by eventually selling the shares that you purchased for more than what you paid for them in terms of the number of dollars, and in terms of the transaction keeping up with inflation. If your strategy works for you, then the profit that is made from this sale is called a capital gain. The stocks that you held and eventually sold are capital assets. A gain arising from their sale is called a capital gain; and a loss arising from their sale is called a capital loss. In general, transactions involving capital assets receive favorable tax treatment when compared to other forms of income. Even though the deductibility of capital losses tops out at $3,000 per year with an ability to carry over any unused losses to the next year, the long-term capital gains are taxed at rates that substantially lower than the rates at which other forms of income are taxed. The key is to hold your capital assets (i.e., stocks, jewelry, art, etc.) for more than one year before selling them at a gain so that you can take advantage of these lower tax rates. Capital gain tax rates can be as low as -0-%; and for 2017, can be no higher than 28%, depending on what was sold and the tax bracket of the taxpayer on other forms of income.
REMEMBER: Some assets are not capital assets. Also remember that though some capital losses are deductible, some are not. The big take-away here is that your tax benefit of paying lower rates on gains from the sale of capital assets – including real property – is only enjoyed when you have held the asset for more than one year before selling it.
2. Office-in-Home Expense Deduction: According to a 2013 GEM Entrepreneurship Report from Small Business Trends, nearly 7 out of 10 (69%) start-up business entrepreneurs started their businesses from home based on reliable data. What was also somewhat surprising was the fact that nearly 6 out of 10 (59%) continued to operate the business from home long after the business was well-established. In fact, study authors observed that “...only one-fourth of the entrepreneurs surveyed stated they had no employees working for their businesses.” Additionally, the number of home-based businesses is not only significant; it is growing.
If you are among the entrepreneurs who run a business and use an area in your home regularly and exclusively as your main place to conduct your business, my guess is that you have at least heard that a percentage of the expenses of your home (e.g., mortgage interest, property taxes, casualty losses, insurance, repairs, maintenance, utilities, depreciation, rent, etc.) can generally be a beneficial above-the-line tax deduction on your return. Additionally, you can convert existing furniture and equipment that you currently own and use only personally into business assets by setting up space in your home that you will use regularly and exclusively to conduct business. Your home office deductions are based on a percentage that you can determine in one of two ways. If you use the square footage method, this percentage is arrived at by dividing your home office square footage by the total square footage of your entire home. If you use the number of rooms method, the rooms in your home should all be approximately the same size. If they are, you arrive at this percentage by dividing the number of rooms (usually, one) used for business by the total number of rooms in your home. The resultant percentage – regardless of the method used – is applied to the various home-related expenses that would become deductible for your business. Form 8829, Expenses for Business Use of Your Home, is used for this purpose. Completing it accurately will apply the appropriate limits that a deduction of this nature imposes.
What you may not be aware of is the fact that as of 2014, there is an optional method to taking this deduction that you may qualify for that could potentially save you a bundle in terms of time, record-keeping-detail, and paperwork. It’s called the safe harbor method. If you have not heard of this, I recommend that you consult a qualified professional tax practitioner and ask him/her about it.
3. Operate a Legitimate Business: Make sure you are operating a legitimate business, and not just an activity from which you do not have every intent of making a profit with. Your activity should not be enjoyable to the extent that you would do it regardless of whether you made a profit at it or not. Unfortunately, a lot of people are under the impression that a primary reason to go into business is to achieve a tax break. There is only one basis financial reason that you should go into business for; and that is, to make a profit. When you go into business to make a profit, there are lots of ways for you to legally reduce your profits that will be exposed to taxation. Please don’t buy into the myth that the reason you go into business is for a tax break. That mythology contributes to the failure of many African American’s businesses. Even if you see yourself as a person running a legitimate business, recurring losses that you show on your return can have other tax-saving benefits that lull you to sleep where other aspects of the tax law are concerned. Business losses (within legal limits) often offset other income on your return with the result being a reduction in taxes. As you come to expect this and benefit from it year after year, be careful not to lose sight of the fact that the IRS expects that if you are truly in business, you are also truly prudent. A prudent person is not likely to continue to invest in, work in, and be subjected to liabilities for being in a business unless doing so has some real measurable economic value to make it all worth it. Generally, this real measurable economic value is called ‘profit’. If your business is not breeding, training, showing, or racing horses, you must show a profit at least 3 out of the last 5 years – including the current year. If you do not, the burden of proving that you are not merely engaged in a hobby rather than a real business effectively shifts from the IRS to you. If you fail to provide that proof, the way your income and expenses (including any losses) are treated on your return will be very different and less advantageous from a tax standpoint.