When it comes to managing your finances as a business owner, it’s not just about how much you earn but also about how much you get to keep. Innovative tax strategies can significantly impact your bottom line. This post will explore ten tax hacks to help business owners optimize their tax positions and keep more of their hard-earned money.
1. Donor Advised Funds (DAFs): A Double Dip for Charitable Giving
One powerful strategy for charitable giving is to contribute appreciated stock to a Donor Advised Fund (DAF) instead of cash. This allows you to enjoy a double benefit – a deduction for the total value of the stock while avoiding recognition of the capital gain. If you still believe in the stock, you can repurchase it on a higher basis.
2. QBI Optimization: Saving Thousands for High Earners
For high earners, optimizing Qualified Business Income (QBI) is vital. Adding back all wages paid and multiplying net income by 2/7 allows you to determine the total wages that will optimize your QBI. This strategy can result in substantial savings, amounting to tens of thousands of dollars.
3. “The Augusta Rule”: Tax-Free Rental Income for Your Home
Renting out your home for up to 14 days can be tax-free. According to “The Augusta Rule,” you can exclude this rental income from your tax return, providing a simple yet effective way to generate extra income.
4. S-Corps: A Smart Move for Consulting Businesses
Setting up your consulting business as an S-Corp can save you on employment taxes. By determining a fair wage for yourself, you can control your social security tax liability. High earners can further optimize by managing QBI and capping Medicare tax on their earnings.
5. Bonus Depreciation – The 8th Wonder of the World
Business owners can leverage bonus depreciation not only for real estate but also for other assets. For instance, purchasing a 6000lb truck on the last day of the year with a minimal down payment allows you to write off the entire cost, providing significant tax savings.
6. Mega Backdoor Roth: A Golden Opportunity for Self-Employed Savers
Through the Mega Backdoor Roth strategy, self-employed business owners have a unique opportunity to contribute up to $60,000 per year to a Roth IRA. This is especially advantageous for those making less than $400,000 who are dedicated savers.
7. Give Yourself Tax Credits: ERC, R&D, 45L, and More
Explore various tax credits, including the Employee Retention Credit (ERC), Research and Development (R&D) credits, and the 45L credit. These credits can amount to hundreds of thousands of dollars, some emerging from COVID-related relief measures.
8. Fringe Benefits: Covering Personal Expenses Tax-Free
Make the most of business expenses by using credit cards and earning points for personal travel. By covering everyday life expenses under your business, you enjoy tax-free benefits and accumulate valuable points for personal use.
9. SALT Cap Workarounds: State Tax Deduction Solutions
With the state tax deduction limited to $10,000 after the Tax Cuts and Jobs Act (TCJA), several states have implemented workarounds. These strategies enable pass-through businesses to pay and deduct state taxes, resulting in potentially substantial federal tax savings.
10. Real Planning and Good Advice: The Cornerstone of Tax Success
As your business grows and becomes more complex, investing time and thought into tax strategy becomes paramount. The key is to have a simple plan that saves you the most, adding complexity only if the savings are worth the hassle. Always consider the Return on Hassle – simplicity with maximum savings.
In conclusion, these ten tax hacks offer business owners diverse strategies to optimize their tax positions. However, it’s crucial to remember that tax laws can change, and individual circumstances vary. For personalized advice and to ensure compliance with current regulations, consult a qualified tax professional. Maximize your tax savings and keep more of your earnings in your pocket where they belong.