4. Tax Deductions
If you are self-employed, you have more possibilities for deductions. Necessary business expenses are deductible to the extent that you may need to spend money to make money. For instance, let’s say that you wanted to open a hot dog stand. Your business expenses may include such things as the hot dog cart, hot dogs, buns, ketchup, mustard, soda and a license to sell hot dogs. All of the things that you need to purchase to get your hot dog cart up and running as a business are necessary business expenses. As your hot dog empire grows, you may be tempted to take a family trip to visit Oscar Meyer. However, if the trip is really a family vacation, that is not a necessary business expense and may not be deductible.
We want to make sure we keep track of certain types of expenses for income tax purposes. These types of expenses, such as those above, may benefit us as we prepare our annual tax returns. While income tax deductions shouldn’t really change the way we spend our money, we need to be aware of the tax effects of how we do spend.