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Consider the last great tax shelter in 2016

My friend Mike is an inventor wannabe. Well, let me rephrase. He is already an inventor. But he wants to be a successful and wealthy inventor. He kicks himself for not coming up with the bacon alarm clock first (yes, the Wake'n Bacon is an alarm clock that will allow you to wake up to the smell of cooking bacon).

Mike has started a business developing a few different products he's created. I'm not sure he's going to make much money on his ideas, but I've often said that having a business – even part-time – is a very good tax idea. Self-employment is the last of the great tax shelters.

As we head into 2016, consider starting a part-time business that will open the door to deductions. Here's a primer on the concept.

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The business

Giving up a day job to become self-employed is not for the faint of heart and is a tough thing to do successfully. Not to worry, your business can be part-time. Doing a Google search on "self-employment ideas" will generate hundreds of ideas, from freelance writer, event planner, pet sitter, and translator, to senior home companion, project manager, tutor, and online dating consultant – really.

The breaks

Once you've figured out the type of business you want to begin, there are many deductions you can claim to provide tax savings. Under our tax law, you're entitled to claim any expense that was incurred for the purpose of producing income from your business, as long as the amount is reasonable. These costs can include advertising, memberships, subscriptions, licences, office supplies, among other things, and the following things you're likely paying for anyway:

Home office expenses

You can claim costs related to an office in your home if it's your principal place of business, or where you use a specific area of your home exclusively for earning income from your business and you meet clients there on a regular basis. You'll be able to deduct a portion of rent, mortgage interest, property taxes, utilities, repairs and maintenance, home insurance, landscaping, snowplowing, and other costs. The deductible portion will be that percentage of your home (based on square feet or number of rooms) used for the business.

Meals and entertainment

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If you're eating out, why not make some of those costs deductible? If you incur these costs for business purposes you'll be able to deduct 50 per cent of those costs against your business income. Make these costs deductible by turning a lunch or dinner at a restaurant into a legitimate business meeting. In some cases the deductible portion can be higher than one-half.

Automobile costs

If you drive for business reasons, be sure to track your trips, and the kilometres driven (googlemaps.com makes it easy to measure kilometres). A portion of all your vehicle costs will be deductible, including gas, oil, repairs and maintenance, insurance, licence fees, car washes and cleaning, auto club dues, capital cost allowance (CCA – depreciation on your vehicle), interest costs on a car loan and lease costs. The deductible portion is generally the percentage of your total kilometres that were driven for business purposes, although CCA, interest and lease costs are subject to other limitations.

Capital cost allowance

You'll be able to claim a deduction for CCA on more than just your vehicle. Other assets can be depreciated for tax purposes as well. I'm thinking of things like computer equipment, software, furniture and even your home. But a word of warning here: Claiming CCA on your home is not usually recommended because this could jeopardize your principal residence exemption and the tax-free sale of your home later. To clarify, simply using a portion of your home for business won't typically jeopardize your principal residence exemption by itself, but claiming CCA can.

Salaries or wages to family

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One of the best things about self-employment is the ability to split income with family members by paying them for work they perform in your business. If your spouse or kids are in a lower tax bracket than you, then paying them income will shift income from your hands to theirs and will save you tax. The amounts you pay should be reasonable for the work done.

I'll talk more about self-employment next time.

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About the Author
Author and founder of WaterStreet Family Offices

Tim Cestnick, FCPA, FCA, CPA(IL), CFP, TEP, is an author and founder of WaterStreet Family Offices. More

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