Starting a business can create tax benefits by converting some personal expenses into tax deductions. What was formerly non-deductible may become deductible when you operate a business, thereby increasing your personal benefit significantly.
For example, when you buy something for $100 (as an employee) using after-tax dollars, you must actually earn about $150 to net the $100 bring-home pay in order to buy the item (due to income taxes and payroll taxes).
In contrast, when business owners purchase a $100 item as a business expense, the deduction may generate a $40 tax savings making their actual out-of-pocket only $60 or so. What a contrast! The employee had to earn $150 to buy the same item that the business owner was able to acquire for about $60.
Personal expenses that can be deducted in business generate a lot of benefit. What expenses are you already incurring that can be converted to business? How about your car, cell phone, internet, computer, printer, office furniture, supplies, medical insurance, home office, some of your meals, travel and perhaps much more.
In order to get tax benefits, the IRS requires that you operate your business with a reasonable expectation of earning a profit. If your “business” activity is deemed not-for-profit (a hobby), you may be limited as to what expenses you can deduct. (See our article: “Does Your Business Look like a Hobby to the IRS?” for more info).