Are you a business owner looking to cut your tax bill? Then, you're in the right place. For a small business owner, taxes can be stressful. You probably wear multiple hats, so giving the government more of your hard-earned business money is the last thing you want to do. Fortunately, you can lower your taxable liability as a business owner by using a variety of tax-saving measures.
Consider some of the strategies listed below if you're looking for ways to lower your taxable income this year.
One of the first tax breaks you can get is the 'Augusta Rule.' The 'Augusta Rule' is a tax loophole that can allow you to rent your own home to your business for 14 days a year. How? Let's say you want to host a team-building event or provide training to your employees. You want to rent a conference room for everyone to gather, but the space costs around $1,000 per day. Instead of doing this, you could rent your own home 14 times a year for the same fair market value of around $1,000 per day. That's a $14,000 tax break now. This deduction alone can save you $5,000-$6,000 in taxes.
Are you in the market for a car, particularly an SUV? The 'Section 179 Deduction' is another significant tax loophole. Business owners can deduct a vehicle's sale price in the first year of ownership. The vehicle must weigh at least 6000 pounds when purchased. Vehicles weighing 6,000 pounds or more, such as the Jeep Grand Cherokee and Ford F 150, are eligible. With bonus depreciation, you can write off 100 percent of the cost of an SUV car between the cost and the deductions allowed. It can't be more than your business's income, and you can't go negative with that deduction. However, if you earned $100,000 and purchased a $100,000 car, you now owe $0 taxes. So that's a strong deduction right there. This tax rule will be in effect until the end of 2022, so make sure you take advantage of it. (could be post 2022.)
Another one for business owners is maximizing deductions. Tracking will be your best friend since the more you track, the more you will be able to take advantage of every available business deduction. If you work from home, for example, you can deduct the square footage of your dedicated home office space. Utility expenses, cell phone bills, or a part of a bill you use for business purposes can all be write-offs. Similarly, if you have a personal vehicle that you use for business, make sure you're keeping track of your mileage. There are many deductions available, so think outside the box and consider all the varied expenses related to your business in some way, shape, or form.
A Roth IRA is an often underutilized retirement savings vehicle. How does it work? First, let's touch on traditional 401ks or IRAs. When you put money into a traditional 401k or IRA, you get a tax deduction the year you put it in, which is why many people prefer them because they pay fewer taxes now. But what happens is that the money grows and grows; it compounds over decades. And then, when you take that money out in retirement, you pay taxes on it. So, if you're paying tax on it in retirement, you're going to be paying a much larger tax.
Roth IRAs work the exact opposite. You put up to $6,000 in it today, and it's after-tax dollars meaning you've already paid the taxes on it. As long as you follow the rules of the Roth IRA, you're never going to have to pay tax on that money again. So it's a great way to pay a little bit of tax today for long-term cost savings. But just the way our government policies are with the amount of debt we have in our country, the mathematical likelihood of tax rates going up is almost a foregone conclusion. So the more money you can get tax-free, the better.
Our last tax deduction is ideal for business owners with kids. You can hire your kids and pay them up to $12,000 per year tax-free as long as they're doing legitimate work for your business. Most parents are opposed to hiring their children because they do not want to break child labor laws, which is understandable if you work with toxic materials or hazardous waste. But if you have a position that requires admin work or data entry, you can hire your eight year old kid. They can earn a little money AND start saving for college or that first business. And it's all tax-free. There are no age restrictions for families on child labor laws. Your child's not going to have any tax on their income. You get that money off your business books as a deduction or an expense for wages. For example, if you have two or three children, you now have $36,000, which may be a $10,000-$20,000 tax saving depending on your tax rate. There are a lot of benefits to hiring your kids in your business, not only from a tax perspective, but tax perspectives are obviously a nice one to have there.
Finally, we hope you found these tax-saving strategies informative and beneficial! Keep an eye out, particularly in the coming months of tax season. We'll be throwing a lot of interesting tax breaks, write-offs, and other goodies your way.
Until next time, cheers!