Deductions Inc.
Despite constant loophole tightening, owning a small business is still a license to deduct. Just a partial list of what can be subtracted from income is dazzling: overhead, salaries and depreciation for equipment; a deduction just for making products in the U.S.; and a $2,400 tax credit in the first year after hiring certain disadvantaged workers.
Then too, there's the fun stuff. Taking clients out for dinner lets you write off 50% of the tab. Travel to Pago-Pago to view a piece of property and you can deduct air fare, hotel and meals. On top of all that, savvy business owners can hire their own teens, skip payroll taxes and funnel the pay into a tax-free college savings plan. As if that weren't enough, you can put vast amounts in retirement plans, even beyond 401(k)s and SEPs.
But can all of this add up to zero? Brent Kessel, co-founder of Abacus Wealth Partners in Los Angeles and author of "It's Not About the Money," shared a client's return (without revealing the name). In 2006 the income from his client's business was $749,000, with another $226,000 in interest and rental income making the total taxable income $975,000.
But the owner contributed $733,000 to his own defined-benefit pension plan (which will pay him a taxable income in retirement). After deductions, his income tax came to $30,000, just 3% of his total earnings. "That's not zero, but it's pretty good," says Kessel. His client also had to pay $30,000 in Social Security and Medicare taxes. Can't win 'em all.
But there's a hitch. If your business loses money year after year or barely scrapes by, the IRS may consider it a hobby and deny the deductions. And small businesses have become notorious for underpaying their taxes; the IRS estimates that they under-report income and fudge deductions by as much as 57%. Accordingly, the IRS has stepped up its audits of small businesses.
Can You Do This? While you're unlikely to ditch a paycheck to found a company strictly for tax perks, keep in mind that reporting any self-employment income opens up a host of deductions, from meals out to your home office to expanded retirement plans.
And even if most or a full 100% of your earnings are from wages, don't despair. Paying no income taxes is usually out of reach. After all, you can't put every penny of your income in retirement savings or dispatch it offshore. You need to pay for food, a home and other necessities.
But, advises Brent Kessel, you can do the usual things - buy a house with a 30-year mortgage and deduct the interest; put as much as you can in your 401(k) or your Roth. "And give something to charity," he counsels. "Maybe it will make you feel better." 
