Entrepreneur tax loopholes: How to save money… legally
Did you know that you as an entrepreneur can use your business (and the current loopholes in our tax system) to save more money? It’s true – and the smart ones are already doing it.
Take Amazon, for example. In 2018, they paid $0 in taxes. Not a type: They literally didn’t pay a cent into the government.
Want another? Look at Netflix.
You should never drastically change your business or the way you run it just to save money on taxes but slight adjustments that don’t impact the value or experience you provide to your customer are smart to implement.
Read on for some of these loopholes and how you can utilize them in your business.
GET 15% OFF YOUR SELF-EMPLOYMENT TAXES
Did you know that with an S-Corp, you don’t have to pay self-employment tax (i.e. 15.3% in 2019) on any profit you make in the business?
Think of it this way, if you make $100,000 with an LLC, you would have to pay roughly $15,300 in self-employment taxes in addition to any income taxes on that same money.
With an S-Corp, you have to pay yourself a reasonable salary for your role, which would incur both the self-employment & income tax, but anything above that would only have the income tax applied to it. None of the self-employment.
So with that same $100,000 that the LLC made, if you operated as an S-Corp and paid yourself $40,000 (with the additional $60,000 being profit), you’d only pay self-employment taxes of $6,120, a savings of over $9,000!
It’s one of the best loopholes for entrepreneurs, and one not enough are taking advantage of.
Typically, this is only really worthwhile once your business hits (or is projected to hit) a profit within the $60-80K range. Until then, you’re not seeing much benefit.
However, if you’re there, reach out to your CPA to see if making the switch makes sense. You only have until March 15th to make this election each year, so put it on your calendar soon to ensure you don’t miss your opportunity it 2020.
RENT SPACE TO YOURSELF TO EARN MONEY TAX-FREE
Did you know that if you rent a space in your home for 14 days or less each year, you don’t have to pay claim it as income?
That means if you host company meetings at your house, throw an employee get-together in your backyard, or need to have a client meeting at your dining room table (that’s me), your business can pay you as an individual rent.
The best part? It’s not only tax-less income for you but it’s an expense to the business. Win-win.
There are a few other stipulations to this, so again, ask your CPA for more info and how you can strategically use this in your business.
USE YOUR RETIREMENT TO PUSH YOU DOWN A TAX BRACKET
When I worked at the public CPA firm 10+ years ago, many of our high net worth clients would use this method to lower their tax liability while essentially pouring that money back into themselves (i.e. their retirement fund).
Here’s how it works:
With self-employed retirement funds, you have up until April 15th (or you file your tax return for the previous year, whichever is earlier) to make retirement contributions for that previous year.
Those retirement contributions, if made to a standard IRA (& not a Roth), will lower your taxable income, which thereby lowers your tax liability.
Thus, you can have your CPA prepare your tax return, see how much you’d have to contribute to be pushed into the tax bracket below you, and then make that contribution.
Even if the required contribution to get to the lower tax bracket is too much, it’s still a good idea to add some as it will decrease your liability anyway. It just won’t lower your tax rate.
BUSINESS EXPENSES DISGUISED AS “PERSONAL”
Many entrepreneurs aren’t taking full advantage of their deductions because they believe certain business expenses are actually personal. The most common are as follows:
Travel. Did you know that even if you spend a few days sightseeing, if you are traveling for business you can write off your travel expenses? You won’t be able to deduct the expenses incurred on the “personal” days, but all of your airfare and the expenses incurred on your “business” days can be run through your business.
Health Insurance. If you or your spouse do not have access to an employer-sponsored health plan, then you can deduct the full-cost of health insurance (but not other medical costs) as an expense as well.
Education. Use Audible to listen to business books? Buy a new marketing book off Amazon? Invest in a course to learn how to better speak in front of a crowd? All are considered deductible if they can be proven to increase your business-related knowledge/skills.
Mileage. Besides driving to your office (if you have one), most other mileage is deductible as a business expense, even if it’s just to go to Target to get pens. Right now, the IRS will allow a deduction equal to 58 cents per mile, so if you drive 1,000 business miles throughout the year, you’ll get a $580 deduction on your tax return. This is why it’s so important to track!
Phone/Internet. Most of us use our phones & computers for both personal and business reasons, but the business part is what is deductible. Estimate the split for each and allocate the costs accordingly. And don’t feel like you run these costs through your business. You can always just add this as a deduction on your tax return at the end of the year.
EXPENSES YOU’RE MISSING OUT ON
I’m not going to reinvent the wheel here. If you’ve found any of the previous loopholes/tips/tricks valuable, then you don’t want to bypass the ones that are most commonly missed by entrepreneurs.
Pick up my FREE tax deduction cheat sheet below that includes a laundry list (& explanations) of the most commonly missed deductions, as well as some that people think you can run through your business but will have the IRS at your door if you try.
The tax law is full of little loopholes for entrepreneurs if you know what they are and how to look for them. How have you saved on taxes in the past?
