3 Tax Deductions Every Business Owner Should Take
Here in the US (and actually most countries from my decades of experience in international tax), the tax code is set up to allow business owners many types of tax deductions. Deductions for employees on the other hand are down to very few things – your 401(k), house, charitable contributions and state taxes and the last three are only available if your Itemized Deductions exceed the Standard Deduction.
CLICK HERE to access the current year's IRS Form Schedule C (Profit or Loss from Business) which is what a sole proprietor or Single Member LLC files for Federal tax returns.
You can get an idea of what is deductible. There are some typical deductions listed but if you go to page 2, Part V, you will see this great little section called, “Other.” This is the best section of the form. You can add expenses here that are related to your business and are deductible. You must be a little careful with how you word things so as not to misrepresent the business use. Contact me with any questions on that.
I was in the tax field for a long time . . . . Below are what I believe to be the biggest missed opportunities for investing in the growth of your business and, on top of that, save you taxes.
#1 - CONTRIBUTING TO YOUR RETIREMENT PLAN
In my opinion, this is the biggest tax savings tool for both business owners and employees alike. Save current taxes and pay yourself (via your retirement account) so what is not to like?
Benefits of a SEP or Individual 401(k)
- Tax Deduction for Paying You – you get a current deduction against your business income for funding your own retirement account. This is such a great opportunity to reduce your tax liability and save for retirement at the same time.
- A bird in the hand is worth two in the bush - In other words, getting the tax savings now is a known quantity. Some will argue that you should put money into a Roth IRA, which is an after-tax contribution so no tax deduction (and depending on your personal situation, that might be the best option). The Roth sounds good NOW, but what the tax laws will be when you decide to withdraw your Roth in the future is an unknown and subject to change. Tax laws have changed a few times in my tax tenure (insert sarcasm). And, remember, tax laws are designed to generate revenue and can bear very little likeness to fairness.
#2 - HIRING YOUR KIDS
If you are a sole proprietor (file a Schedule C with your tax return), Single Member LLC (who is taxed like a sole proprietor for Federal tax purposes), or have a partnership with your spouse and you are also the parents, you can hire your kids.
Yes, they have to actually do something legitimate in the business but, hey, you can find something for those rug rats to do, right? Here are some ideas:
- Making copies
- Posting on social media (they will be faster than you anyway)
- Data entry
- Making phone calls (if they are old and mature enough)
- Cleaning your office (oh ya)
Benefits of Hiring Your Kids:
- Wages are deductible - and the money stays within the family. Nice, huh?
- Wages are Exempt from Social Security and Medicare Taxes - payments for services of a child under age 18 who works for you are not subject to social security and Medicare taxes. The wages are subject to income tax withholding but depending on how much they earn, they may be able to claim exemption from withholding for federal purposes. Consult your tax professional to see if this would work for you in your business.
- IRA eligibility for your child - what you pay your child is considered earned income so that they (or you) can fund an IRA contribution on these earnings on their behalf. Starting young is one of the greatest wealth building tools there is because of the compounding effect. More on that later.
This deduction WILL NOT work if your child is being paid from:
- A corporation, even if it is controlled by the child's parent
- A partnership, even if the child's parent is a partner, unless each partner is a parent of the child, or
- An estate, even if it is the estate of a deceased parent
#3 - INVESTING IN YOURSELF AND TEAM
Start investing in what’s most important, YOU! And, voila, your business will also benefit! I have had many small business clients who had trouble when it came to spending money. People can be short sighted when it comes to investing in areas where they would get the most bang for their buck. They are suffering from poverty mentality and living in scarcity. This attitude and belief system will stifle you AND your business growth. There is a saying that “people who pay, pay attention,” so there is great value in investing in something that you greatly desire. You will take it seriously and move closer to your goals. Remember, money is energy so start directing it to what you value most and you can really never go wrong.
Here are some investment ideas that are tax deductible:
Coach and Consulting Fees - I know, you are thinking this sounds self-serving, huh? The truth is that I would in no way be where I am today if I hadn't hired coaches and consulting help along the way and you won't find a highly successful business owner who hasn't. You might be thinking that you will invest AFTER you make money but that psychology is flawed. You WON'T make money unless you get the help first. The rewards come after the investment. And every business owner needs an objective expert to help them start and then grow their business. You can't overestimate the power of outside expertise and guidance.
A good coach or consultant will help you:
- Clarify your direction
- Plan a Strategy and Action Plan and Hold you accountable (and help you avoid the pitfalls of resistance patterns)
- Help you or refer you to others when you need new skills (marketing, website, etc. )
- Maximize Your Energy - Helping you surround yourself with the right info, people, environment, etc.
- Clearing Your Negative Mindset and Blocks - #1 thing that blocks your business growth
Books, Audios, Seminars and Online Courses - and set aside time each day to read, listen or watch them. Eliminate just one TV show and invest in yourself.
I hope that these have helped you realize where you can save additional taxes and how to increase your retirement, wealth, and personal growth.
If you would like to chat about how I can possibly help you grow your business and wealth, CLICK HERE for a 30 minute call - would love to get to know you and your needs better!
p.s. Join me in my Facebook Group, The Total Wealth Entrepreneur - CLICK HERE TO JOIN
NOTE: Any information provided here is for general education only and is not to be construed as tax or financial planning advice. Please consult your tax or financial professional for advice in your particular situation.
About the Author
Kimberly Adams is a Business and Wealth Coach, Speaker and Author. She has the unique combination of having spent decades in both the tax and financial world as well as decades devoted to personal growth and transformation with many certifications in coaching, speaking and energy healing