As a business owner, the idea of maximizing tax deductions can be exciting and overwhelming. If you are like most, you may feel that there is money being left on the table but unsure of how. As with anything related to taxation, it is a good idea to consult with your CPA and financial planner on your specific situation. Below we will outline some easy ways for business owners to maximize their deductions.
After two years of meals being fully deductible, meals and entertainment are once again 50% deductible. These meals include those with partners, clients, and prospective clients.
Make sure when you are getting a meal with staff, colleagues, current clients, and prospective clients (is your friend group a prospective client?) that you are not missing out on a chance to deduct an expense.
Employ your Spouse
Hiring your spouse can qualify them for several tax and social security benefits. If you pay your spouse a minimum of $6,560 they will earn a four quarter’s worth of social security coverage (minimum of 40 quarters are required to qualify for social security benefits).
Additionally, income of at least $3,000 (or $6,000 with two or more children under 13) can qualify you for the child and dependent care credit.
If your business sponsors a 401(k) plan, you can increase their pay to $22,500 (or $30,000 if over 50) to max out their 401(k) contribution for the year.
Hire your Kids and Contribute to their Roth IRA
The idea here is shifting after-tax dollars that would be taxed at your rate to your child’s potentially tax-free rate
and then ultimately used for their needs or saved for their long-term benefit. In 2023, each child can earn up to $13,850 tax-free in exchange for services rendered. The next $11,000 would be taxed at a 10% rate and the following $33,725 at 12%.
These funds can be paid to the child and then used to cover expenses that they incur, invested in a custodial account, or used to fully fund their Roth IRA – limit of $6,500.
The tax value for someone in the top tax bracket paying their child $13,850 would be a tax savings of $5,124.50 per child.
Do not claim your college age children as dependents
Once your children reach college age, you can enable them to claim education related tax credits if they are not claimed as a dependent. Unlike deductions, tax credits are a dollar-for-dollar reduction in an individual’s total tax bill. The American Opportunities tax credit can be claimed for the first four years of higher education then the Lifetime Learning credit can be used thereafter.
The American Opportunities tax credit is worth $2,500 if your child pays for $4,000 worth of expenses. If you employ them, you can pay them for their services and they can then use their pay for those expenses to qualify. If your children do not owe a tax bill up to $1,000 of the credit is refundable.
The Lifetime Learning credit is worth 20% of qualified expenses up to $10,000 for a maximum of $2,000. This credit cannot be used at the same time as the American Opportunities tax credit so therefore would only be used for any education expenses after the first four years of college – though the lifetime learning credit is not limited to higher education. This credit is not refundable so your child would receive no benefit if they do not owe taxes for the year.
Rent your Property for 14 Days or Less
Known as the Augusta Rule
due to locals renting out their homes for the weeks leading up to The Masters golf tournament, the tax code allows a homeowner to rent their home for up to 14 days and not owe any income tax for doing so.
As a business owner, if you have a home that could be rented to your business for a corporate retreat, board of directors meeting, or other corporate event you have an opportunity to receive that income tax free. There are requirements related to acceptable rates you can charge the business for these events so you will want to document justification for pricing and consult with your CPA.
Home Office Expenses
In the age of COVID you may have found yourself working from home, investing in a home office and all that come with it. If so, make sure you are claiming the home office deduction if eligible and all other home office expenses you may be incurring.
The home office deduction can be claimed if your home office is 1) regularly and exclusively used for conducting business and 2) you must use your home as your principal place of business. You can claim a simplified deduction of $5 per square foot (up to 300 sq. ft.) or a regular method that values your home office based off the overall expenses of your residence.
Additionally, office expenses can be deducted on Schedule C for a business owner. This write-off will include office supplies, postage, computers, desk, phone and internet, and any other ordinary and necessary items you need to run your office.
Business owners with charitable intent – or marketing savvy and a reason to possibly be highlighted in a certain local area a charity operates – can obtain tax benefits by donating directly to the charity from the business. Unless the business is a corporation or an S corporation, the charitable gifts would pass-through to the owner of the business as an itemized deduction.
In addition to cash gifts, your business can gift property, equipment, or mileage and other travel expenses incurred working for a charitable organization. An easy example would be the donation of your businesses goods or service as an item that could be bid at during the charities upcoming silent auction.
Similar to strategies discussed in our post on charitable giving strategies
, you can gift appreciated stock to a charity or donor advised fund as a way to avoid capital gains taxes in addition to the charitable deduction.
Buy a car that will earn you a deduction
If you are purchasing a car for business use, you can earn up to $19,200 in regular and bonus depreciation in the first your of ownership. If you are purchasing an SUV that weighs over 6,000 pounds you can depreciate potentially 100% of the cost in year one through a Section 179 deduction if the car is used solely for business purposes. If not used only for business, the depreciation cap will be proportionate to the business use of the car.
If you are looking to purchase an electric vehicle, confirm whether the vehicle you purchase will qualify for the electric vehicle tax credit of up to $7,500. The credit begins to phase out after a manufacturer has sold over 200,000 units – to confirm whether a vehicle qualifies and the amount of the credit you can visit fueleconomy.gov/feg/taxevb.shtml
Optimize your Employer Retirement Plan
The appropriate type of retirement plan that is right for your business will depend on the number of employees, demographics, and the level of benefit you’d like to provide your employees. This is not only a way to potentially save $66,000 ($73,500 if over 50) per year towards retirement
but you can avoid payroll taxes on any employer contributions to yourself or any employees (including your spouse).
If your business does not have any employees, a SEP IRA or solo 401(k) can both potentially get you to the max $66,000 threshold. If Roth is your preference the solo 401(k) will allow you to contribute up to $22,500 ($30,000 if over 50) in Roth money to the plan.
For businesses with more employees, structuring your 401(k) plan properly can allow you to reach the $66,000 threshold with as little match money to employees as necessary. With a new 401(k) plan you can earn a tax credit of up to $5,000 for each of the first three years your plan is in place and additional credit of up to $1,000 per employee for employer contributions made for employees earning less than $100,000 during the first year of the plan.
Utilize an HSA
Health Savings Accounts
are the only account type that are triple tax-exempt – tax deductible contributions, tax-deferred growth, tax free distributions for qualifying expenses. If your family is on a High-Deductible Health Plan you qualify to contribute to this type of account.
You can contribute $3,850 if single or $7,750 if married and get an additional $1,000 catch-up contribution at age 55. The funds can be used tax free for qualifying medical expenses or can be invested.
Those choosing to invest can hold onto their receipts for qualifying medical expenses and reimburse themselves at a later date. For example, if you incurred $50,000 worth of medical expenses in years that your HSA was active you can reimburse yourself tax free at any time.