Business people have unfair economic advantages over wage and salary earners. Here is how I have a financial edge over most of this article’s readers.
Officially I am retired. I am drawing a government pension. I would have liked to continue working for a few more years. But, unfortunately, I just don’t have the stamina to put in an eight-hour day at any occupation. My day goes much better after my second nap. I’m a good example for setting the retirement age at 65.
To occupy several hours a week and some extra shekels, I have a tutoring business. I do this task in the late afternoon or evening when I’m stronger. To minimize the chance of any “allegations,” I drive to my students’ houses, where there is another adult around. I really enjoy helping teenagers better their skills in math, chemistry, and physics. And I’m paid reasonably well paid for my time and experience.
Because I am working free-lance with several “employers,” I can call this a business. And businesses can deduct legitimate expenses from the revenues they earn. I get taxed on the difference between revenue and expenses. If I were a regular employee, I would be taxed on revenue.
One of my expenses is using my vehicle for this business. For example, one of my clients lives four kilometers away. So my round trip is eight kilometers, which I can “write off” against my revenue. The Canadian tax laws allow me to charge myself $0.70 per kilometer. In this case, it is $5.60 per visit to this client.
I am in the 25% tax bracket. So each trip means my vehicle usage can reduce my tax bill by $1.40.
I can see some of you rolling your eyes sarcastically backwards: “Wow, Dave, you sure are getting a great perk.”
To get this small perk, I have to keep a log of these trips, which means I have more administration in my life. I might get a $100 tax reduction this year.
And adding the expense of “personal car for business purposes” will be a red flag for the tax auditor to say: “Well, let’s look at Dave’s log.” I could get an audit for this $100 of tax savings. It just does not seem practical for me to declare $0.70 per kilometer against my tutoring revenue.
Sometimes we do strange things for strange reasons. I have incurred some small stationary expenses for my business. I do not bother to put them in the “tax deduction” category. But for some reason, I want to deduct this car use. I can see bigger business trips might happen, so maybe it’s a good time to start reporting car expenses now.
And I am due for a tax audit. I would rather be audited for this car expense than for other things.
There is another advantage for declaring vehicle mileage. While I get a $1.40 per trip bonus for using my personal car for business. I can make side trips with this business trip. For example, I might go buy groceries after my session with my student. I still claim $5.60, but my grocery store trip is now partially paid for by my business trip. The business trip subsidizes the trip to the the grocery store.
There are lots of little things a business person can deduct that have a dual business and personal purpose. Getting these little advantages helps business people build up their wealth a little faster than non-business people.
The Farm Pickup Truck
I grew up on a small farm in southern Alberta. We had a farm pickup truck, the truck where I learned how to drive, starting at the age of 10.
This truck had so many farm tasks. Here is my list:
1. Taking workers and workers’ lunches to the fields
2. Hauling hay bales and feeding cows
3. Hauling irrigation equipment
4. Hauling fence posts and barbed wire
5. Hauling livestock. We had a small cage that could be easily added to or removed from the truck (called “stock racks”). One cow or four pigs.
6. Hauling small loads of grain
7. A workbench
8. Driving to town to get farm equipment parts and other farm supplies
This truck was the most necessary machine on this farm. It was a workhorse.
Lots of memories with this 1970 Dodge Adventurer. Photo from www.barnfinds.com
And it was also a personal vehicle. This truck was used for social visits, like visiting neighbors and relatives or an occasional trip to the pub. It drove kids to Boy Scouts, Girl Guides, sports, and music lessons. It drove my father and mother to their many volunteer activities in our community. I estimate this truck was 70% farm and 30% personal. But my father never kept a log. He wrote off the entire truck expense as 100% farm. Tax auditors seldom challenge farmers.
Wage earners have to pay their taxes first before hauling their kids around. Farmers can haul their kids around tax-free — if they use the farm truck.
The Modern Farm Truck
Pickup trucks are still part of farm life today. But they no longer do many of the tasks the farm truck of my youth did. For example, much of the today’s hauling would be done by ATVs and ATV trailers. My farmer brother uses an ATV for irrigating instead of a pickup. I estimate that today’s farm trucks are 30% farm and 70% personal. Today’s farmers don’t keep a log of vehicle usage. But they get the 100% tax benefit.
And many of these farm trucks are more luxury than workhorse. This could be fodder for another Medium article.
The Business Lunch
When I had my oilwell-testing business, I had to market to the decision makers in the Canadian petroleum industry.
Before I started my business, I knew there was a certain amount of graft in this industry. But there were enough honest operators that one could find a niche if the product/service was of high quality and competitive price.
By graft, I don’t mean money moved from the contractor to the oil company decision maker. A direct cash payment was a good way for professional people on both sides of the graft to get fired. But small gifts were given out for “appreciation.” These were often called “business entertainment.”
Personally, I didn’t see much difference between a $100 bill and a $100 Calgary Flames hockey ticket. But somehow the latter was OK.
Business lunches were a common gift. The contractor would take a client for lunch and pay for that lunch. Sometimes, the lunch became an important criteria to decide between two equal competitors.
I had four big clients. Two of them had corporate policies that not even business lunches were allowed. It was clear that I got their business because my company did good work. My other two clients seemed to be somewhat in the graft train, but they never hinted that they wanted more from me. I gave them an annual lunch (or two) and some swag.
But these lunches were so important in my future marketing. In a luncheon environment, my clients would let their guard down. I would learn things that helped me to market my services, like figuring out how much I could charge them. My services were about 20% more than my competitors — but I knew I could not go to 40%.
When I took a client to lunch, the whole expense was tax deductible. I had to eat anyways, but my restaurant food was paid for before I paid my taxes. That is an economic advantage.
My clients got a free meal. They too did not have to pay taxes before they ate. Non-business people have to pay taxes before they eat a restaurant meal.
Late in my six-year business sojourn, there was political pressure in Canada to reduce the obvious advantage business people had with free lunches, event tickets, and other grafty things that made up the expense called “business entertainment.” The Canadian government made business entertainment as 50% tax deductible instead of 100%. The business community howled with this change. But I didn’t have enough of this expense to make much difference in my bottom line.
That was 30 years ago, I’m not sure what the tax laws are now. But even with a 0% deductibility, business entertainment would still be part of North American business culture. These non-office activities help build relationships for more efficient business later, but they also come too close to the graft line.
Maybe my two clients who did not do lunches had the right idea.
Conclusion
Over 35 years of farming, my father changed my family’s economic class from “working poor” to “upper middle class.” He retired with a comfortable nest egg. He worked hard, and he worked smart. He had good timing — and took advantage of the new agricultural technology of the 1960s. He plowed his early profits back into the farm, making it more efficient and synergistic.
But he also had another wealth-creation tool. He could channel some of his personal expenses into farm expenses, reducing his taxes. And that is a little advantage to creating wealth.
Being in business gives business people this tool. Personally, I don't have a problem if these perks are reasonable. But sometimes they are not reasonable.
Published on Medium 2024
