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In the words of the famed recording artist… Jay-Z:
“This might offend my political connects”.
The TRUTH needs to be told – so here we go.
Having a home office is a great tax advantage if you actually have a Home Based Business.
Meaning that you are a highly motivated and extremely serious entrepreneur, who is putting in a serious effort to create or sustain their lifestyle.
But, starting a home based business just for a purpose of writing off “extras” to save money during income tax time… is a very serious flawed strategy.
The truth is… it doesn’t work like that.
In this video I walk you through the rules and show you with real numbers just how the deduction works.
However, despite the fact that it is a seriously flawed strategy, there are a many of individuals who use the glorious idea of having a home-based business to lure you in to sign up under them.
And a high percent of those individuals are from the Network Marketing industry.
The Network Marketing Industry, is an industry where a vast majority of those who are in it, earn the better part of their commission when they get other individuals to join under them.
In most circles, it’s labeled as “building your team”.
Now, I am going on record stating that I don’t have a problem with the Network Marketing Industry or the individuals who are in it.
I personally know a few great individuals who are in the industry and doing well.
What I do have a problem with are those individuals who use manipulative tactics to entice people to “join their team”.
And for some reason or another, the opulence of a home based business seems to be the most popular of those tactics.
This was brought to my attention via an email I received from someone telling me that they had watched a video that told them that they could get a tax refund each month if they had a home based business.
Of course, I was like whaaaaaat?
I didn’t want to immediately debunk what the video was saying, so I offered my opinion of what I think they may have meant, but just to be sure I asked for the link to video, in which they sent to me.
While watching the video I immediately became upset.
It was full of, in my opinion, very misleading information.
And the worst part of it, was that the video was titled “Start Collecting Home Based Tax Savings Today”, but in the video, it didn’t show you how to do it.
In order to find out how, you would have to sign up with the company and then they would show you all you need to know.
Yeah. Ok. 🤔
See. The thing is…
A home based business is a title that should be reserved for entrepreneurs who actually work from home.
The key word in the phrase Home Based Business is – Business.
Meaning that the person who is claiming an Home Office Deduction has an actual business.
The IRS defines a Business as:
Any activity carried on for the production of income from selling goods or performing services.
That’s a very broad definition I know, but there is a very thin line between what the IRS calls a business and a hobby.
The problem is when an individual joins one of these Network Marketing teams… they become an Independent Contractor for that business. They don’t necessarily become a business.
Yes, as an independent contractor, you will be treated as a business, but the underlying entity is still an independent contractor.
And the problem with that is… If the individual is deemed to be engaged in a “profit seeking activity” but not an actual trade or business… all income will be treated as hobby income and expenses will be limited or not allowed at all.
In order to make this determination, the IRS has created what they call the 9 Profit Tests.
Those 9 tests are simply a set of facts and circumstances that is measured against the activity of the individual to see if they are in fact acting in the capacity of an actual trade or business.
To see the 9 Profit Tests Factors (Hobby vs. Business) in action register here for my free training:
So, again, please note that a Home Based Business is a real thing and having Home Office Deductions is a real tax advantage.
But joining a network marketing team just for the sole purpose of being able to deduct home office expenses is a bad idea.
When I ran the numbers, what I found was astonishing.
I ran 12 different scenarios and found that most would lose when adding a home based business to their financial situation.
The only time there was a positive outcome was when there was a loss involved.
Losses are a part of business.
They happen. Often.
But, when they happen to people with W2 income, the IRS becomes suspicious and wonders if the activity is a “profit seeking activity” but not an actual trade or business?
And when they get to thinking like that… it’s time to start preparing for some substantiation.
Of course, I couldn’t run everyone’s situation, as everyone has a different situation which would result in multiple different outcomes. But within the 12 that I did run, the pattern was the same.
I’m going to end my rant here.
But I would like to end by saying:
If you are a serious entrepreneur, startup, independent contractor, freelancer, etc… and you work from home, the don’t worry about anything. Your efforts will be justified.
To see the deduction in action, I have created a free tool that will allow you to play around with the numbers so you can see your possible deduction and understand how it all works.
If you have any questions… Let me know.