Tax Tips Secrets That Equals More Money for Firms
As a consulting firm owner, there are specific money management strategies that will enable you to reduce your taxable income, thereby reducing your tax liabilities legally.
In this episode, I will outline a few useful tax tips any consultant or firm can use.
Being a consulting firm owner, there are certain tax deductions you want to take advantage of to reduce your taxable income. The goal is to max out your tax deductions.
And while most tax deductions are not a dollar-for-dollar return, which is a misconception that many have. You can receive 10% and 40% sometimes more back depending on your tax rate.
So, let jump into a few deductions you can implement right now.
If you hire your spouse and offer them tax-free fringe benefits, the business can cover your medical expenses. As a business owner, you cannot deduct medical expenses unless they exceed a high threshold amount of 7.5 % percent of your adjusted gross income. But if you hire your spouse and create and offer a self-insured medical reimbursement plan, you could cover your spouse and their family, aka – you.
As a self-employed professional, you can cover medical expenses that a standard insurance policy does not cover IF your spouse legitimately works in the firm.
Shift your business from a sole proprietor or single-member LLC to an LLC filed as an S-Corporation to save on taxes.
I have another episode that details this strategy. But what I will tell you is that if your company is earning $70,000 plus in annual revenue, your business will pay $0 in taxes when set up as an S-Corporation. As the owner, you must pay yourself a reasonable salary for this tax benefit to take full effect.
Many consulting firms are virtual; therefore, they operate out of their home office, like me. You can save at least $13,000 plus using the home office deduction.
Because you work out of your home in a space designated just for business, you could also deduct some of your property taxes, mortgage interest, depreciation, repairs, utilities, house cleaning, and mileage as part of these deductions. In another episode, I outline how to use either the square foot method or the simplified method. Check that out here.
Did you know that if you use your car for business and you can deduct 100% of its operation?
If you use your vehicle for both business and personal purposes, you must divide your expenses based on actual mileage. For 2020, the standard mileage rate is 57.5 cents per mile.
You also must keep track of your business mileage during the year to use this tax deduction. If you 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. But even if you use the IRS standard method, you can still deduct the business's share of interest, taxes, and even tolls.
When making purchases for your firm, make sure you are using your firm's bank card or credit card. You want to keep all source documents, receipts, etc., that show proof of your purchase.
By doing this, when it is time to file taxes, you will have your tax deductions itemized. I also recommend setting up and maintaining an accounting system. An accounting system allows you to determine your quarterly estimated taxes instead of waiting until the year-end to receive a surprisingly high tax bill.
I'll provide several tax-saving strategies in upcoming videos, and I'll go even deeper into some of the ones I mentioned here.
The biggest mistake when it comes to taxes that agency owners make is waiting until tax season to determine their tax outcome instead of completing tax planning and financial management in advance.
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