If you have a job and are struggling to make ends meet:
Start a business. All personal meals eating out become tax deductible business meals. Every mile you drive now becomes a tax deductible business trip going to and returning from meeting with prospective customers or investors.
Even if your business makes $0. Business expenses typically reduce taxable income. If you know the amount your taxes will generally be, you can adjust your tax withholding with your employer so that less money is withheld from you. Then you will have more money in your paycheck each month, hopefully now helping you make ends meet. It is as simple as it sounds.
Step 1: Go to IRS.gov to apply for an Employer Identification Number (EIN), this is the business entity version of a social security number. This is also a necessary piece of info used to open a business bank account. I would suggest classifying as a single member LLC.
Step 2: Register your business with the state that you intend to do business in.
Step 3: Search for a bank near you that has the lowest minimum deposits thresholds and lowest fees for both personal and business accounts. Open a personal account and a business account. Also apply for a business credit card that same day.
Step 4: From here on out it is understanding tax rules, to know what can count as a business expense. It is widely accepted that a very high percentage of businesses fail, so a business that loses money, is the idea we are leaning into. Without a business, all of your expenses are personal expenses and generally not tax deductible. With a business, many personal expenses now become business expenses and are tax deductible, such as food and mileage.
The Math: Federal taxes use fairly basic math formulas. For simplicity these numbers will be close but not exact and based on 2022 federal taxes, assume an unmarried person makes $40K as an employee for some company. That person's federal tax bill would be ~$4,600. If that person has net business losses of $8K, because their business expenses outpaced business income. The person's net income reported to the IRS is $40K - $8K = $32K. People can choose to file 2 separate filings, 1 as a person and 1 as the business entity they own. Or they can combine the filings and report earning $40K as a person and losing $8K as a business entity. Now with net income of $32K, the federal tax bill goes from $4,600 to $3,600. This would then result in a federal tax refund of $1,000. Once they have an idea of how much their refund will be, they can adjust their tax withholding with their employer, to receive the $1K evenly throughout the year, instead of one lump sum payment the following year. On a monthly basis this would be an additional $83. Unless told otherwise, the employer will continue to withhold taxes assuming the employee will file taxes as only earning $40K. The employee would fill out W-4 forms with their employer to only withhold taxes based on the combined net income earned as a person and loss as a business entity. WARNING: get a sense of how much your business losses will be BEFORE making changes to your tax withholding. By withholding too much and not losing enough money, you will end up owing taxes.
Step 5a: Food. 100% of people who own businesses need to eat. In response to COVID-19 hurting restaurants, for a short time 100% of business meals purchased at restaurants was tax deductible, but that expired at the end of 2022. Reverting back to 50% of business meals purchased at restaurants are tax deductible. Having a business bank account helps legitimize your business and you want to purchase these expenses using your business account. Cooking meals at home saves you money. Eating meals at restaurants saves you money via lower federal taxes. Every time you eat out at a restaurant, carryout, gas station, or fine dining, you are doing so as a business owner. Also keep track of your receipts each year. I personally use an app called Fetch to take pictures of receipts.
Step 5b: For those that have vehicles, everywhere you drive is a business expense. You are either coming or going to meetings with potential customers or investors. If not, you are driving around for market research or business inspiration. Regardless, track all the miles you drive. On average people drive 12,000 miles a year. Mileage reimbursement changes but at ~$0.60 per mile, driving an average amount per year, that is $7,200 worth of business expenses.
In conclusion: having a business and reporting business losses lowers a person's federal tax liability. The more income someone earns and the more business expenses they can justify as losses, the greater their tax savings will be. It is common for businesses starting out to lose money so you having a business that loses money isn't audit worthy. Keep good financial records and read what the IRS considers to be a reasonable business expense.
