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The tax code is pretty complex, which makes taxes the least favorite subject of business owners. The thing is, you can hate it as much as you want, but you can’t ignore it.
Not understanding taxes can mean giving away a massive chunk of your hard-earned money to the government, and that’s the last thing you would want as a business owner.
Owning a business gives you several advantages of deducting a lot of your expenses from your total income, which individuals don’t. That’s why every business owner must know a few of these common deductions or ways to save taxes.
In this blog, Preston Anderson from Anderson.tax will help you learn how to save taxes as a business owner. So let’s begin!
Ways to Save Taxes as a Business Owner
Many small businesses in the US are overpaying their taxes mostly because of poor tax planning and lack of knowledge about the biggest tax write-offs they can use to save taxes.
Here is the list of some of the biggest and most common tax write-offs that every business should know about and take advantage of.
1. Home Office
So many people, especially during the pandemic, are working from home. If you’re also working from home or using some part of your residential property for business purposes, then you can use it as a tax advantage.
According to the IRS, if a part of your home is regularly and exclusively being used in connection with a trade or business, then you can deduct all the expenses incurred on it. The keyword here being “regularly and exclusively.”
It doesn’t necessarily have to be the principal place of your business. If you meet patients, clients, or customers in your home, then also you qualify for the deduction.
There are several other criteria to qualify as well. But if you do qualify, then you can deduct expenses like your property tax, utilities, insurance, depreciation, interest payment towards the property’s mortgage, etc. on that part of your home.
A lot of people don’t take advantage of home office expenses because their accountant says it’s a red flag. But if it’s a legitimate expense that you can prove in case of an IRS audit, then absolutely take it. It’s like leaving money on the table if you’re not deducting a legitimate expense.
2. Hiring Your Kids
Many business owners are not aware of this, but if you hire your kids inside your business, you get to pay them 100% tax-free.
You can also hire your spouse or any other family member for that matter. There are not one but several benefits of doing so.
First, you get to eliminate taxes on income paid to your child or family member. Second, they don’t pay any taxes on income earned upto $12200, adjusted for inflation every year.
Also, depending on your state and legal structure, children working for their parent’s business can avoid employment (FICA) or/and unemployment (FUTA) taxes as well.
Now, there are several things you need to keep in mind, or this strategy may backfire on you. First, you must be properly structured as a business. Second, your children should be involved in a proper job and do the work in order to get paid. You can’t just pay them for the tax benefits.
Now, the rules are different for children under and over 18, so you need to must check the IRS website or with your accountant.
3. Medical Expenses
If you have a business, and you have medical expenses. Depending on how you’re set up, you can write-off all your healthcare related expenses from your business income.
If you have an S-corp, then that doesn’t necessarily qualify. But if you have a C-corp or a sole proprietorship, then you can set up something called a medical expense reimbursement plan.
A Medical Expense Reimbursement Plan is basically a plan set-up by an employer or business to reimburse out-of-pocket medical expenses incurred by their employee. All medical expense reimbursement plans are tax-free.
As a sole proprietor or C-corp, you can set up a medical expense reimbursement plan for yourself, that will cover you and all your dependents.
So every single expense that your family incurs for any type of medical expense, whether that’s glasses, chiropractors, or even your health insurance. All of them will be covered by your business, meaning you can deduct them from your business income in your tax filing.
Now, there are obviously some qualifying criteria that you need to check on the IRS website or with your accountant to see if you can make use of a medical expense reimbursement plan or not.
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4. Business Travel Expenses
This is something that a lot of business owners miss out on, mainly because they’re not aware of it. According to the IRS, any expenses incurred by you on traveling for any business purpose are deductible from your taxable income.
So if you had to travel to a different city to attend a business conference or any other work-related trip, you can deduct the cost incurred on travel by airplane, train, bus, or car. You can also deduct hotel expenses, baggage charges, cost of meals, and other qualifying expenses.
You cannot, however, deduct anything from your personal travel expenses. So, for example, say you went on a 5-day trip to attend a business meeting, but since the place was very good, you decided to extend your trip to 10-days to spend some personal vacation time.
Now, you can deduct all the expenses incurred in the first 5 days of your travel, since it was for business purposes. However, you can’t deduct anything from the rest of the 5 days because that was for personal purposes.
5. Credit Card Rewards
Another very less known way to save taxes. As a business owner, if you have a business credit card and you get cash backs. Those cash-back points reduce your credit card bill, but they are actually taxable to you.
But if instead, you get credit card rewards and use those rewards for personal travel or a personal expense, then those rewards are 100% tax-free.
So as a business, you can use a business card like Amex Plum to pay for your business’s advertising expenses and get rewards in exchange that you can use for traveling tax-free.
Why this is only for business owners and not individuals is because cashback on personal credit cards is considered a rebate, which is not taxable. However, rebates to a business are always taxable.
6. Choose Your Tax Structure Wisely
Before everything else, this step is insanely important. When you’re choosing a structure for your business, like a C-corp, S-corp, partnership, or sole proprietorship. What you’re essentially doing is determining how and how much are you going to be taxed.
It also determines what and which type of tax exemptions and benefits you will be eligible for as a business.
There is no one best structure that suits all businesses, or everyone would be just using that. So it’s important that you consult a professional to understand which structure will work best for you.
To discuss all of the structures briefly. A sole proprietorship is a type of structure where from a tax perspective, the business and individual are a single entity. In simple words, the business does not pay any taxes, but the business owner pays all the taxes on earnings as ordinary income tax.
A partnership is also the same as a sole proprietorship when it comes to taxes. The business itself doesn’t pay any taxes, but the partners or owners do.
A C-corp is different because here, the business or corporation and the owner are two separate entities. Thus, they both pay their own taxes separately.
S-corp is also a separate legal entity, but it doesn’t pay its own corporate tax. The owners are taxed instead of the business, just like a sole proprietorship or partnership.
So there you have it, the 6 best ways how to save taxes as a business owner. Now, you can ask your accountant if any of these works for your situation, or better yet, you can just book a free consultation with Preston to discuss your tax situation and get custom solutions from him on Anderson.tax.