Owning the System: Tax Savings for the Business Owner
One of the biggest advantages to being a business owner is the tremendous amount of tax benefits that are available to you. The tax system is truly in the favor of the entrepreneur. Although you have to pay self-employment taxes (which is ultimately an investment to your retirement/social security account), there are many different tax claiming strategies that will help maximize your tax savings and minimize your tax liability. This article will lay out some of the most popular tax benefits available to business owners.
Virtually any expense (ordinary and necessary) directly related to your business is tax deductible. Unless you own a C Corporation, these expenses flow right through to your personal/individual taxes. Some of these expenses include your business meal (50% deductible), parking, hotel, phone, office expenses, legal and professional services (i.e. a tax preparation fee or the fee you pay to set up your business), and any state and local business taxes paid. So the rule of thumb is that if an expense is related directly to your business, you’ll more than likely be able to deduct it. Simple enough.
Note: If you use your car for your business, not only can you deduct the miles driven, but you may also be able to claim a deduction for the depreciation on the car. If you buy a brand new car, you may be able to deduct the entire cost of the car in the year you bought it and placed it into service.
One of the biggest misconceptions about business owners is that they can’t save for retirement. This is a complete myth. Business owners are actually allowed to save more for retirement than non-business owners (i.e. employees). The rule of thumb is that any retirement savings contributions you make are tax deductible, unless you elect a Roth retirement vehicle (which there would be no deduction, but the withdrawals would be nontaxable). Some of the different retirement accounts for the self-employed include the Simplified Employee Pension (SEP) plan, SIMPLE IRA plan, SIMPLE 401(k) plan, Individual 401(k) plan, and the Keogh plan. More details about these plans will be provided in a later article, but just keep in mind that you don’t have to work for someone in order to save for retirement.
If you use part of your home as an office space, you can deduct some of your expenses on your tax return. You have the option to use the simplified method or the regular method. The simplified method is used by simply multiplying $5 by the square footage of your office space, up to a maximum of 300 square feet. The regular method is used by taking all of your home office expenses such as your mortgage interest, insurance, utilities, repairs, etc. Normally, whichever is the greater of the two is the one you choose. This is an excellent way to not only save money from having to rent out an office space, but it also allows you the ability to deduct your expenses that you wouldn’t have otherwise been able to deduct. Note that the portion of your home that you use as a home office must be used exclusively and regularly for your business.
Health Insurance Premiums
Any and all medical insurance premiums (including dental and long-term care) you pay for you and your family are tax deductible.
One-Half Self-Employment (Social Security) Tax
One-half of the self-employment tax you pay can be written off in the form of an adjustment. So not only can you contribute to your retirement/social security account, you can also get back one-half of what you pay. What a beautiful world: two for the price of one.
These are just a few of the many tax benefits available to business owners, although these are the most popular ones you’ll find out there. Not everyone is meant to start their own business, but if you do, the IRS has your back. To achieve the best tax results, you should consult with a tax professional throughout the year to help maximize your tax savings and minimize your tax liability.
Please let me know if you have any additional questions.
The information presented in this article is for informational purposes only. It does not represent tax advice to any specific individual or business as circumstances differ for each individual or business. Furthermore, the information presented in this article is based on current tax law as of the date this article was published. Tax laws are subject to change in the future and this article may not be updated for future tax laws that may arise, unless otherwise noted.