According to a 2018 survey from Clutch, a B2B research, ratings, and reviews company, thirty percent (30%) of small businesses believe they overpay their taxes and could claim more deductions and credits.
As an entrepreneur, you know: The quest for revenue is never-ending. That means, besides attracting new customers, you’re also scouring expenses to see where you might make cuts. Instead, it’s time to focus on minimizing one of the biggest (and sneakiest) expenses you face. Taxes.
“Quite often, small business owners overlook some great tax reduction opportunities,” says Tyson, author of Small Business Taxes For Dummies®, Second Edition. “Yes, we all have to pay taxes, but there’s no reason to overpay. Employ legal tax reduction strategies, send less to Uncle Sam, and you’ll automatically keep more revenue for yourself.”
Keep reading to learn nine things you can do this year to improve your business tax situation:
1. Invest in wealth-building assets
During your working years, you probably don’t need or want taxable income from your investments, because it can significantly increase your income tax bill. So, Tyson advises investing in stocks, real estate, and small business investments.
These offer the best long-term growth potential. They are a tax-friendly option as well, because you’re in control and can decide when to sell and when to realize your profit. Hint: As long as you can hold on to these investments for more than one year, your profit is taxed at the lower, long-term capital gains rate.
2. Fund some retirement accounts
When you funnel your savings dollars into retirement accounts, such as 401(k), 403(b), SEP-IRA, or SIMPLE IRA, you can earn substantial upfront tax breaks on your contributions.
“If you think that saving for retirement is boring, just consider the tens of thousands of tax dollars these accounts can save you during your working years,” says Tyson. “And if you don’t take advantage of these accounts, you may well have to work many more years to accumulate the reserves necessary to retire.”
3. Contribute to a health savings account
HSAs hold promise for people to put money away on a tax-advantaged basis to pay for healthcare-related expenses. Money contributed to an HSA is tax-deductible, and investment earnings compound without tax and aren’t taxed upon withdrawal so long as you use the funds to pay for eligible healthcare costs. So, unlike a retirement account, HSAs are actually triple tax-free!
4. Calculate whether a deduction is worth itemizing
The IRS gives you two methods of determining your total deductions. You can either choose the standard deduction method, or you can choose to itemize. Standard deductions make sense if you make a regular paycheck, have a rented apartment, and have no large expenses. In 2019, single people qualify for a $12,200 standard deduction, and married couples filing jointly get a $24,400 standard deduction.
The other deduction method is itemizing. This procedure is more of a hassle, but if you can tally up more than the standard deduction amount, itemizing saves you money. Your personal property and state income taxes are itemizable, up to an annual cap of $10,000.
Further, if you pay a fee to the state to register and license your car, you can itemize the expenditure as a deduction. (However, you can deduct only the part of the fee that relates to the car’s value.) Because you can control when to pay particular expenses that are eligible for itemization, you can shift more of them into selected years to take full advantage of itemizing. However, if your itemized deductions are equal to or less than the standard deduction, take the standard deduction.
5. Trade consumer debt for mortgage debt
Suppose you own real estate but haven’t borrowed as much money as your lender allows. And suppose you’ve run up high-interest consumer debt. In that case, you may be able to refinance your mortgage (borrowing at a lower interest rate than your credit card bill) and pull out extra cash to pay off your consumer debt. You may even get a tax-deduction bonus, because while consumer debt isn’t tax-deductible, mortgage debt usually is.
“Remember that refinancing your mortgage and establishing home equity lines involve fees and charges,” says Tyson. “Keep these expenses in mind when weighing the pros and cons of this strategy. Also, be aware that borrowing against the equity in your home can be an addictive habit that can handicap your ability to work toward other financial goals. Stay responsible.”
6. Consider charitable contributions and expenses
When you itemize your deductions on Schedule A, you can deduct contributions made to charities. Most people already know that when they write a check to a college or house of worship, they can deduct it. Yet many taxpayers overlook the fact that they can also deduct expenses while performing activities for charitable organizations.
For example, when you go to volunteer at a soup kitchen, you can deduct your transportation costs getting there. You can also deduct the fair market value of donations of clothing and other goods to charities; just keep your documentation of donated items.
Finally, you can deduct contributions to local schools, including youth sports programs, as long as the money goes to the overall team rather than being earmarked for your child. You can even deduct the cost of driving your kids to school events.
7. Scour for self-employment expenses
If you’re self-employed, you already deduct a variety of expenses from your income before calculating the tax that you owe. When you buy a computer or office desk, you can deduct those expenses. Employee salaries, office supplies, rent or mortgage interest for your office space, and phone expenses are also generally deductible.
“Although more than a few business owners cheat on their taxes, some self-employed folks don’t take all the deductions they should,” says Tyson. “Be sure you take advantage of deductions for which you are eligible.”
8. If you’re married, crunch the numbers on filing separately
About 5 percent of married couples file their federal income tax returns under the status of “Married Filing Separately.” Most do so to save money, but there can be other reasons, such as each spouse not wanting to be liable for their spouse’s tax transgressions. To know if you should consider this option, crunch the numbers. Couples with the following characteristics may benefit:
- If one spouse owns a pass-through business that is eligible for the 20 percent pass-through deduction but loses that deduction due to the combined income of their spouse.
- If one spouse has high medical expenses, which can be written off when they exceed 7.5 percent of adjusted gross income, but loses that deduction due to the higher combined income with their spouse.
- If the couple lives in a state that has a tax code that may favor spouses who file separately.
- If you have a tax preparer, be careful to understand their additional fee for filing separate returns as that cost may wipe out the potential tax savings.
9. Consider working overseas
When you work in a foreign country with low income taxes, you may be able to save big-time on income taxes. For tax year 2019, you can exclude $105,900 of foreign-earned income (whether you work for a company or are self-employed) from U.S. income taxes.
To qualify for this exclusion, you must work at least 330 days (about 11 months) of the year overseas or be a foreign resident. If you earn more than $105,900, don’t worry about being double taxed on income above this amount. You get to claim credits for foreign taxes paid on your U.S. tax return, and the IRS gives you two extra months, until June 15, to file your tax returns.
Remember two caveats to this exclusion. First, many of the countries people dream of living in—such as England, France, Italy, Sweden, Germany, and Spain—have higher income tax rates than the ones in the United States. Also, this tax break isn’t available to U.S. government workers overseas.
Every penny counts
“When you’re running a small business, every penny counts,” says Tyson. “Having more revenue in the bank can make the difference between struggling and thriving. A smart tax strategy can help more than you may have ever realized.”
Eric Tyson, MBA, is the author of Small Business Taxes For Dummies®, Second Edition (Wiley, March 2019, ISBN: 978-1-119-51784-9, $26.99). Eric is an internationally acclaimed and best-selling personal finance author, counselor, and writer. He is the author of five national best-selling financial books including Investing For Dummies, Personal Finance For Dummies, and Home Buying Kit For Dummies. He has appeared on NBC’s Today show, ABC, CNBC, FOX News, PBS, and CNN, and has been interviewed on hundreds of radio shows and print publications.
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