FINANCE WHY SAVING ON YOUR TAXES MAY COST YOU YOUR DREAM HOUSE

WHY SAVING MONEY ON TAXES MAY COST YOU YOUR DREAM HOUSE

by Lynn Gagne

A common dream of many entrepreneurs is one day buying their dream home. A status symbol for some, it’s the manifestation of years of hard work, determination and success.

Others just want a little corner of the world to call their own.

Your little business is up and running and you are making a little extra money.

At last, you feel you’re there.

How to get here?

Make the hard decisions. Grieve them. Work on yourself every day. Ask for help. Take steps to become selfsufficient and proud of yourself. It is always an equation, make more money or reduce expenses. If you cannot get the expenses off, you will need to use whatever method there is even if it is hard, ie. bankruptcy. It will not magically get any better, unfortunately. I heard this somewhere once “Embrace the suck.” It will not always suck. But it will at the start. Dream up that magical new life and what it will be like. Then make it happen.

Off you go to your financial institution about that home loan. And then you hear the last thing you expected: “I’m sorry, but you don’t qualify.”

How did that happen? Whether it’s a dream home, new home, or little starter-upper, the path to attainment is generally the same for business owners, whether you’re a sole proprietor or you own and incorporated company.

If a home purchase is a future goal in your mind, then this is a must-know.

You don’t qualify for the purchase tomorrow. You qualify two years ago.

The formula is simple: money you made, minus the write-offs, equals what you pay taxes on. That number is called “net income”.

Net income is important! It is what the bank looks for when they see if you qualify for your dream home.

Claiming too many write-offs and setting your income too low will affect your credit for two years.

Let’s say you make twenty thousand a year. On paper, at least.

You could be taking a lot more money out of your business, but if that twenty thousand is a year is all you’re paying taxes on – which is really no tax at all – then you’re not going to qualify to purchase that home. The “net income” or the money you declared as your income, is just simply too low.

Or almost any other major purchase, for that matter. What about if you made $100,000 this year and $20,000 last year? Most lenders will average out the last 2 years. In this scenario, you will only have a net income of $60,000. Likely not enough to qualify for a house. Start looking ahead two years now and decide what you’re buying then. Two years from now it may be too late.

There’s no going back in time to change what’s on the books.

How can you know ahead of time how much money you need to be making to seal the deal?

If you’re going to make money in the next couple of years, figure out a price range for that future home.

Contact a mortgage broker and ask what you would have to make to qualify for a home in your chosen price range to get your golden number. $80,000 for example. For the next two years, you’ll need to ensure you’ve not only made, but been taxed on, that $80,000 each year.

Many new entrepreneurs underestimate the planning.

Some assume that because business has picked up and the profits are much better now, getting that home loan In fact, a history of reliable income is the real deciding factor.

When you are planning on making a major purchase in the next 2 years and you are self-employed, it (literally) pays for you to plan ahead.

Lynn of BWize Consulting & Training is a certified professional bookkeeper who spent more than 30 years running businesses, including owning a professional bookkeeping firm with more than 300 clients over ten years. She built her company around providing tools to small business owners so they can keep more money in their pocket.