The goal of a business owner is to pay the lowest amount legally possible in taxes. Unfortunately, it is said that business owners are overpaying in taxes by $12,000 on average each year. I believe this is because business owners are not aware of the tax loopholes they can use to their advantage. Well, today is your lucky day! As you gear up to prepare your taxes, I want to provide you with ten overlooked tax deductions that could save you thousands.
Disclaimer – This video is for informational purposes only. Tax deductions, tax rules, and regulations can change by the blink of an eye, so make sure you refer to the IRS website and your tax advisor.
Free Resource – Download the Tax Form Checklist today. The checklist complements today's video by providing additional strategies and a checklist that will enable you to have a stress-free tax time.
Now let's jump into the ten most overlooked tax deductions.
The tax benefits of a retirement plan are that your contributions are generally made with pre-tax dollars. You don't pay taxes until you withdraw funds (take distributions). When you use pre-tax dollars to fund your retirement account, the IRS allows you to reduce your taxable income by that amount. Therefore, you can write-off contributions made to qualified retirement accounts such as SEP, IRAs, 401K, and Solo 401K. As a business owner, you can open a SEP – Simplified Employee Pension or a Solo 401K
- SEP - you can contribute up to 25% of your net earnings from self-employment, which is $58,000 for 2021. The deadline to establish a SEP is April 15th
- Solo 401K – this is a retirement plan that covers the business owner who has no employees. The great thing about a Solo 401(s) is that the contributions can be made from both positions, the owner and the company itself.
Start-up & Organization Cost – Any cost needed to establish your business can be written off. For example, maybe you hired an attorney to start your business, perhaps you enrolled in a training program, or spent money on marketing. All of these costs can be written off. The costs you incurred before starting your business are considered start-up and organization costs. As the video's date, you can write-off up to $5,000 in your 1st year in start-up and organization costs.
Home Office Deduction – This is the most significant tax write-off for many small business owners. As a business owner, you need to have a dedicated, physical office space in your home that is used exclusively regularly as your principal place of business. To take this deduction, you can use the square method or the IRS simplified method.
- Square Method – You want to measure your office's size and divide that square foot by the total square foot of the home. You will then use this number to determine the percentage of your home's expenses that you can write-off in your business. Such as rent, mortgage, utilities, cleaning, repairs, etc.
- IRS Simplified Method – You multiply the square foot of the home office times $5. You have to cap this at 300 square feet minimum, which is $1,500.
Cell Phone Service & Cell Phone – You can write off you're the portion of your cell phone bill that is used for business. You can also write-off the purchase of your cell phone again if you use it for business.
Labor Cost – You can and should deduct all costs related to anyone working for your business. The labor cost includes both employees and contractors. Be sure to onboard your employees by having them complete a W4 form upon hire. For contractors, have them complete a W9 form before assigning work to them.
Hire your Kids – You can hire your kids to work for you and pay them up to $12,000 as of this video's date and use that as a tax write-off. The great thing about this is that your child does not have to pay federal taxes on that $12,000.
Business Mileage – You can deduct every mile you drive for your business purposes. The key is to keep a mileage log that clearly identifies trip's too, from, and the purpose. For 2021 the standard mileage rate was 56 cent.
- If you are a self-employed business owner and use your car solely for business, you can decide if you want to write off the vehicle's actual expenses or use the IRS standard mileage rate.
- You can not deduct mileage used for personal reasons.
Business Interest Expense – If your business has loans or debt, you can write off the interest charged to you to have the debt or loan. Listen, you CAN NOT write off the principal payments you make on the loan. You can write-off the entire portion the bank earn, such as interest expense.
Health Savings Account – You can establish a health savings plan for you and your employees and deduct the contribution you make to your employees' HSAs as a business expense. Also, the employees' contribution to the HSA is not subject to federal income tax. Health Savings Account is a win-win for everyone!
Self-Employment Tax Savings – If you own a business earning more than $40,000 in Net Income, you can save on self-employment taxes by converting your business to an LLC taxed as an S Corporation. As an S Corporation, the business becomes a pass-through entity, and the shareholders of the entity are taxed based on their ownership percentage. The key here is that you must pay yourself a reasonable salary as the owner of the company. I have a video called How To Correctly Pay Yourself As A LLC or S Corporation on my YouTube channel.
CEO's Next Best Steps
To implement these tax-saving strategies, you need an accurate, reliable accounting system. If you need help with establishing an accounting system or shifting to an S Corporation, we can help. The deadline to change to an S Corporation is March 15th, and it's never too late or early to begin having a reliable financial management system. Contact Say Yes To Profits today for more information.