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Stay On Good Terms With The IRS
Taxes are complicated, but they don’t have to be. We have to follow the rules to avoid trouble with the law. These rules are in place to protect us and ensure everyone pays their fair share in taxes.
These same rules also offer a way for American citizens to save money on taxes; however, before we talk about that, let me first explain how our tax system works and how you can stay on good terms with the IRS.
The Tax Code For Beginners
The tax code or internal revenue code (IRC) are the rules we follow to prepare our taxes correctly and stay on good terms with the IRS. It is the rule book that gives us the legal tax deduction.
Think of the IRC as a book of laws. For example, as drivers, we have to follow the DMV laws to not get a speeding ticket, get into a car accident, be arrested, etc. Likewise, the laws found in the IRC are designed to maintain order.
An important note about the tax code is that only a tiny portion of the code (74k pages) is dedicated to W2 owners. So if you’re someone who just works a normal job and has no side business, then you don’t have as many tax write-off opportunities.
On the plus side, being a W2 and having no side business means filing your taxes will be a little easier during tax season. It also means you have a lower risk of accidentally running into any tax code violations.
However, if you’re a W2 with a side business, then you have access to all the tax deductions available. If you’re a business, you have access to the majority of the tax code. Of the 74,000 pages available in the IRC, 73,000+ are designed just for you as a business owner.
So if you want to take advantage of all the tax deductions available, and stay on good terms with the IRS you will have to own a business. Businesses can come in various shapes and sizes. They don’t have to take you away from your full-time job either. It’s up to you to decide what kind of business to start.
No matter what business you choose, the tax benefits will be a lot better than before when you were just a wage earner.
Tax Write-Offs: What is considered legal and illegal?
A write-off is considered legal if found in the internal revenue code, case law, or publication.
For example, remember when we were in grade school, we had a book called the code of conduct? This code of conduct was used as a book of guidelines on how students should behave in school.
Whenever you were unfortunate enough to end up in the principal’s office, you would sometimes see the dean bring out the code of conduct as a reference instructing you on how you should behave.
Well, the revenue code, case law, or publication operates the same way as the “code of conduct” in regards to taxes. These documents contain all the write-offs considered legal and okay for us as citizens to use.
Why is this important? Now you’ll be able to write off taxes with confidence knowing the tax write-off is 100% legal to use and stay on good terms with the IRS.
Writing off personal purchases as a business expense
Claiming tax credits that you don’t qualify for on purpose.
Not reporting all your income.
Lying about your income.
Claiming your pet as a dependent.
How to prove that you mean business to the IRS
One important thing to remember from this blog is that tax write-offs are based around “the pursuit of income.” As long as you are trying to make money, then you are a business owner in the eyes of the IRS
Whenever the IRS audits you, the IRS will try to prove that you’re doing a hobby and not in business.
A business can be any size shape, and it doesn’t even have to be profitable to qualify for tax deductions. Some people only work 4 hours a month in their business!
The IRS may look at business and try to label it as a “hobby.” In the world of taxes, a hobby does not qualify for the same tax deductions as a business.
So the IRS might try to claim that you’re ineligible to be writing off expenses as business expenses.
However, if you’re able to prove that you’re pursuing income, you have a real business, and that automatically qualifies for tax write-offs.
As a business owner, it’s up to you to decide what expenses are ordinary and necessary in your business.
If you’re thinking about starting a business, we will discuss more on how to turn your hobby into a business in our next blog post called:
“8 Steps On How To Turn Your Hobby Into a Business,” and stay tuned for more educational content!
In conclusion, our tax system has rules for every American citizen to follow. These rules can be found in three different documents: the IRC, case law, and publication.
These laws do provide a lot of potential tax write-offs for businesses but very few for people who are W2. A person on W2 can benefit from the tax code by creating their own side business.
One of the ways they can do that is by turning their hobby into an actual business. We will discuss how you can do that in our next blog post.