I'm a Canadian on TN status working in California. I've got a good paying job at a tech company and I'm looking for ways to reduce the amount of taxes that I will pay.

I'd like to start a small business and use deductions from that to reduce the amount of income tax I need to pay. Rent is very expensive, so I was hoping I could find a way to relate my rent expenditure to the small business.

I don't foresee the business making a lot of money, but I'm hoping I can still use deductions from it on my income tax. The business would likely be running at a loss indefinitely and just for tax purposes.

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    What is your goal? The amount of money you'll spend in order to get the deductions will be far more than the amount you'll save on your taxes. Unless your goal here is simply to fund various levels of government as little as possible, I don't see the point. – chepner Aug 28 '19 at 15:59
  • @chepner Why do you say that I'll spend more money than the deductions I'll save on my taxes? I'll be paying more than 50k in taxes. My goal is to navigate the tax system to maximize the money I can take home. – Klik Aug 28 '19 at 16:09
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    See D Stanley's answer. The point of deductions is to ease the tax burden on necessary expenses. You have to incur the expense first, though. Whatever expenses you have now, without the business, are by definition not going to be business expenses. – chepner Aug 28 '19 at 16:15

Yes, you can decrease your tax burden by suffering business losses. The only expenses you'd be claiming would be actual spending you do. So, if you spend $100 in advertising and have $0 revenue, you have $100 in losses which saves money on taxes but costs you money in total.

The exception to this is home office expense, since you are already paying rent. If you portion out some of your dwelling and use it for business exclusively, you could save on taxes without additional spending. Similarly the portion of utilities associated to your home office can be deducted.

It is acceptable to have losses year over year, but if audited you'd have to prove that you are intending to make money (profit motive) and not just trying to dodge taxes (tax fraud). If you aren't running a legitimate business that happens to lose money, then you are likely to have losses disallowed and/or face penalties.

I would suggest you focus on using a side business to make more money rather than viewing it as a way to save on taxes. The IRS can easily sniff out attempts to dodge taxes, so make sure it's a legitimate business endeavor. Keep separate financial records, and research allowable business expenses thoroughly to make sure you have a defensible position in case of audit.

Here's a handy IRS article on Deducting Business Expenses

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    It's worth saying that the IRS is well aware of the possibility of running a business solely for tax purposes, and will be very strict on you if you fit that pattern. You will really have to set aside a room in your house just for the business and use it for nothing else. – DJClayworth Aug 29 '19 at 15:29
  • @DJClayworth Good call, I edited to emphasize that notion as well. – Hart CO Aug 29 '19 at 15:39
  • You can also only do this for so many years (3 out of 5 I think) before your "business" is deemed a hobby by the IRS. – Damila Aug 29 '19 at 18:00
  • @Damila That's a commonly stated notion, but it's not a hard and fast rule, a business can operate in perpetuity with losses. Examples are common where there are paper losses (ie asset depreciation causes losses). It's not a bad guideline though, as you'll draw attention and need to defend your business if always posting large losses that offset normal income. – Hart CO Aug 29 '19 at 18:08
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    Thanks. It was not meant as legal advice (I'm not a lawyer or an accountant). I do think that a business that runs a loss for many years that is just a business (don't a lot of tech companies run loss for a long time, waiting for the giant buy out?) is allowed, but a sole proprietor running a loss and offsetting more conventional income on a personal 1040 will be looked at sideways (pun intended) by the IRS. – Damila Aug 29 '19 at 18:29

Sure, if the business loses money, which means that you'll have to spend more than it earns. But the definition of "business expense" is fairly narrow.

For example, you can't deduct your rent as a "business expense" just because you have a side business. It's still a personal expense and is not deductible. You can only deduct expenses that are directly and completely business related. If you try to claim your rent as a business expense, you're setting yourself up for an audit.

In general, you're going to end up spending a dollar just to keep from sending 24 cents (or whatever your marginal tax rate is) to the government.

NOTE: I'm very broadly generalizing. In reality, there are many nuances to business income tax rules, but my main point is you can't classify your personal expenses as business expenses just to avoid taxes.

  • I thought about running a tutoring service at my residence, which I hope would allow me to deduct my residence expenditure. – Klik Aug 28 '19 at 16:11
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    You could only deduct a fraction of your rent, proportional to the area that is devoted exclusively to your tutoring service. – chepner Aug 28 '19 at 16:16
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    "exclusively" is a very key word here. Essentially you need a separate room that is used ONLY for the business. – D Stanley Aug 28 '19 at 16:18
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    Bathroom? Not deductible. Bedroom where you sleep? Not deductible. Watch TV in the living room when you aren't tutoring? Not deductible. – chepner Aug 28 '19 at 16:21
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    @Klik please consider carefully the comments on this answer. You can't just wake up one day and decide "oh, half of my apartment is for my business" and then deduct half of your rent. You have to be able to actually prove regular and exclusive use of the space for a business that intends to make money. If you convert a spare bedroom to a home office, but then let guests stay in it for a weekend, you lose the deduction. If you do that tutoring business at your kitchen table, you can't deduct anything. – dwizum Aug 28 '19 at 18:58

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