Tax-Saving Hacks You Need to Ask Your Tax Preparer About
DISCLAIMER: We are not Tax Preparers nor play them on TV. Please consult with your friendly neighborhood Tax person or IRS website before implementing any of these deductions and strategies.
Now that that's out of the way....
Taxes are often the single biggest expense for small business owners so savvy tax strategies can make a huge difference in your bottom line. The best part? Most of these tax-saving moves can be put into place before your business even starts generating revenue.
Home is Where the Tax Savings Is
The Home Office Deduction allows you to deduct a significant portion of your household expenses. To qualify, your home office must be used exclusively for your business. There are two ways to calculate the deduction:
Actual Expenses Method: Deduct a percentage of your mortgage interest or rent, utilities (water, internet, electricity), real estate taxes, and insurance. The percentage is based on the portion of your home dedicated to the office.
Simplified Method: Deduct $5 per square foot, up to a maximum of $1,500.
Leveraging this deduction can reduce your taxable income, making it a great way to cut costs if you meet the criteria. And remember you can also deduct the full cost of qualifying equipment and software purchased or financed during the tax year as well.
Master the Augusta Rule
Did you know you can rent your home to your business for up to 14 days per year, and that income is tax-free? Derived from Internal Revenue Code Section 280A(g) (but also referred to as the Augusta Rule), this strategy allows you to rent your residence for business purposes, such as board meetings, networking events, or filming marketing materials. The rental amount must be reasonable, which you can determine by researching rental rates for similar venues.
Your business can write off the expense, and you can collect tax-free income. To stay compliant, make sure to document activities with meeting minutes, agendas, attendee lists, and photos. This not only maximizes tax efficiency but also adds a layer of professionalism to your business operations.
And don't forget, you can deduct 50% of the cost of meals (even outside of your home) if they are business-related so hold on to those receipts
Put Your Kids to Work
Forget just taking your kids to work, if your kids are doing legitimate work for your business, consider paying them a salary. Wages paid to your children are a deductible business expense, as the practice aligns with IRS guidelines on deducting wages paid for legitimate work performed for a business. As long as you pay them under the standard deduction limit ($13,850 for 2023), that income is tax-free for them. The types of work they can perform include administrative tasks, cleaning, data entry, or even social media management.
Combining this strategy with a retirement account allows your children to start building investments early—and they can even gift back some of their earnings to help the family. It's a win-win that benefits the business while setting your kids up for financial success.
The Perfect Business Partner - Your Spouse
Similar to above, paying your spouse for legitimate work done for your business is another tax-saving tactic. This makes them eligible for business travel expenses, meals, and more—potentially expanding deductions for your company. Additionally, your spouse’s employment allows you to increase retirement contributions, adding another layer of tax-deductible expenses to the business.
This strategy not only helps you save on taxes but also brings your spouse into the fold, providing more benefits for both the family and the business.
The Pleasures of Business Travel
To maximize travel deductions, combine business and personal trips in a way that most or all of your travel costs are deductible. More than half of your days away must be for “ordinary and necessary” business purposes—like meeting clients, attending conferences, or networking.
For example, if you travel to Los Angeles on a Thursday for a conference that ends on Friday and schedule client meetings on Monday, your travel and hotel expenses are fully deductible, and meals are 50% deductible. If your spouse and kids are on payroll and they’re working during the trip, their travel expenses are deductible too.
The $30,000 Question
Once your business starts generating at least $30,000 in profit annually, forming an S-Corp could save you between 8-50% in taxes. This structure allows you to save on self-employment taxes, although there are additional costs to consider, such as extra tax filings and payroll processing fees. Typically, the tax savings outweigh these costs at around the $30,000 profit level.
To elect S-Corp status, you'll first need to form an LLC and then file IRS Form 2553. This step is best done in consultation with a tax professional to ensure it’s done correctly.
Wrapping Up
Implementing these tax strategies can have a significant impact on your business's financial health. Taxes may be inevitable, but paying more than you need to is not. Take charge of your finances today by speaking with your tax professional about how these strategies could work for your business. Reducing your tax burden is one of the most effective ways to boost your bottom line, leaving you more money to invest back into growing your company.
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