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Sohodojo Advisory Board Member
Jim Schneider
The Taxman86 Speaks...
23 August 2000
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High Speed Internet Is Here; Whose Tax Cut Numbers Are Correct; Five Months And Counting

1. The Numbers are in and they are impressive.

3M High Speed Cable Modems by the end of the year and 6M by the end of 2001. DSL is supposed to be growing faster, especially if Voice Over Internet becomes reality.

If these are correct then there will be 5M to 10M at home high speed internet connections in the next 18 months, many of which are being used by home-based businesses. Yesterday we saw a complete high speed computer, printer and moniter for less than $900, digital cameras at less than $200, and high speed internet at $39 per month. Starting a Home-based business has never been less expensive, especially since it is all tax deductible.

Can you have a home-based business while you work full time? How about with the entire family, husband and wife, and kids included even when you are traveling? The key is to avoid the Passive Activity Loss rules under IRC Section 469 which requires 500 or more hours of active participation in the business activity [husband and wife are counted as one]. However, C Corporations that are not Personal Service Coprorations are exempt from these rules.

What are the benefits? How about $20,000 in IRC Section 179 deductions, fringe benefits, including retirement plans that you can borrow from if properly structured. Income splitting between family members. How about fiscal year-end so that you can defer almost one-year's income, and the list goes on. There will be three things required, in our opinion, high speed internet, high speed computer, the web site [the business] and the incorporation and off you go into being your own financial entity, or financial freedom if you will.

If you think this is far out thinking then see what others are doing. "...Michael Fuchs is certainly following his impulse to travel. Mr. Fuchs, a former Time Warner executive, is now the chairman of Autobytel.com, an online auto retailer based in Irvine, Calif. But he is also the interim chief executive of MyTurn.com, an e-commerce products and services company in Alameda, Calif..."

Or see the latest from Hollywood, all of which is being produced on home-based high speed computers with high speed internet.

The creative ones are free, free at last. They are no longer restricted to the corporate bean counters. Business and pleasure have merged into the home with high speed internet, where ever that may be, and the tax rules have not seen it coming.

2. What is a Billion here and a Billion there when we are dealing in Trillions.

Projecting federal tax receipts over the next ten years [they are running at $2T annual today] must be fun, with expected surpluses at $4T+ , even after increases of $3.5T over today's rates. That sounds like $25T to $30T in federal tax receipts to us over the next ten years.

Is it possible that a tax cut of $1.3T over ten years is reckless? That a tax cut of $500B over ten years is prudent? We will not get into this fight because statistics can be used in any way you want but a tax cut of 5% does not sound extreme to us.

It sounds like the same story we heard in 1998 when a proposed Small Business Tax Cut of $86B over five years would have broke the bank [fear, more fear is the mantra]. That Small Business Tax Cut would have increased health insurance deductions to 100% for small business, the IRC Section 179 deduction to $25,000, and the Unified Transfer Tax Credit for estates of $1M or less, all effective in 1999.

3. Tax Planning begins at home, and starts now.

We see it every day, tax planning opportunities, the biggest of which is the deferral of income. If you are on the cash method, defer receipts, and accelerate deductions is the story. How to do that is the big question? First off check your living expenses, including utilities, if you are in San Diego [cost of electricity was 3 cents per kilowatt last year and it is 20 cents today (what, no inflation?)], your travel expenses, including the car payments, and then assume that you could convert those to before-tax dollars. That is the target. If those expenses were deductions [commuting expenses are not deductible but employer paid commuting is and it may be working] what would be your tax savings? We believe that tax savings begins at home and if you run the numbers we believe you

Jim Schneider, LL.M.

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