Let’s not beat around the bush. Owning a small business is the best tax deal in America.
No matter the size of the business — whether it’s a $10k side hustle or a $10MM business — earning business income opens up an amazing opportunity for tax savings and wealth creation.
By owning a small business, you can use tax write-offs that allow you to effectively earn less but come out ahead through tax savings.
The first and most common write-off opportunity is business expenses. Business income opens up an opportunity that W-2 employees are not privy to — bonafide business expenses. Direct costs associated with the business are deductible, but many expenses exist in your life already.
I used to work as an employee for a CPA firm. I would earn income, and then pay for my cell phone, automobile, education and training, and other unreimbursed expenses after tax.
When you have business income, you get to buy before tax.
For employees, most have a home office that they are unable to deduct come tax time. This is not the case for business owners. They can claim a large number of similar expenses such as:
These are deductible expenses that money is going to be spent on regardless. There are other deduction opportunities if you use personal assets such as your home or vehicle for your business.
If you are a business owner who has employees, you can save on employment taxes as well. These taxes are 15.3% — you can save on these taxes by opening an S-Corp and paying yourself a reasonable salary.
This gives you the ability to bifurcate their employment from your ownership and pay yourselfu a salary — oftentimes saving thousands in employment taxes. You can even hire your spouse and/or kids to work for your business as well.
The QBI deduction, also known as the Qualified Business Income deduction, is a big win for business owners. It lets eligible businesses take off up to 20% of their qualified business income. That means extra money in your pocket!
This deduction was introduced as part of the Tax Cuts and Jobs Act in 2017 when they lowered the tax rate for C-Corporations. It's meant to help small businesses and entrepreneurs by lowering their tax burden.
To qualify for the QBI deduction, you need to be a business owner or a shareholder of a pass-through entity like a partnership, S corporation, or sole proprietorship. Your business also needs to be in the United States and have qualified business income.
There are a few limitations and rules to keep in mind. For example, certain types of businesses like service-based professions may have extra restrictions on the deduction. Also your deduction may be limited by the wages you pay.
When it comes to benefits, small business owners can save hundreds of thousands of dollars in tax savings and deferrals. Small business owners are able to provide themselves with benefits such as medical care and retirement. Medical reimbursement plans, SEPs, 401ks, and DB Pensions can be a great source of savings as well.
If you have no other employees, you are able to provide yourself with "Cadillac" benefits like you're a Fortune 500 CEO.
Real Estate is one of the most tax efficient businesses out there. Well owning your own business allows you to get some of the tax benefits of real estate. By buying a property that is effectively connected with your business, you get access to those sweet savings.
This is one of the few areas of the tax code where regular folks have access to good debt on assets that grow in value over time.
Business assets open up the opportunity to own real estate as a part of the business. Other assets like business equipment and automobiles also qualify!
One more, though it’s not one people often think of. Succession planning. As a general rule you aren't able to sell your W-2 job to someone else, but business owners can capture the value they have created over the years of building their businesses. I have a friend who recently sold his business for more than the net profit he generated over the last 10 years of owning it
Business owners have the ability to set up succession plans and sell at tax-favorable capital gains rates. There’s a break on Medicare tax on certain sales too. In addition, installment notes stretch out income recognition and create a retirement annuity. QSBS (qualified small business stock) is also a great option!
While all of these expenses can be a source of great tax savings for you and your business, understand that this is only a brief overview of these concepts. There are rules that apply to these opportunities; however, the benefits can be massive when properly applied, yet dangerously damaging if misused.
It’s important that you seek out professional help and experienced counsel to maximize the benefits of these principles and assure they are properly applied. Once you do so, enjoy the tax savings that come with being a small business owner.
Beyond bookkeeping, we are the end to end tax and financial service for founders and solopreneurs. From expense classifications to tax filing and recommendations, we have you covered.
Bookkeeping, tax planning, and tax filing made simple. Sign up, connect your banks, and get back to work.
.svg)
.svg)
.svg)