I pick up the phone and hear an all too common question.
My business is having a record-breaking year. I saw the new quarterly estimates and it is crazy how much money I will owe in taxes.
Is there something we can do to lower my tax bill?
For most business owners a great way to lower taxes is by deducting expenses through their business.
Tax deductions for business owners are part of an overall tax planning strategy for business owners.
In this blog, we are going to give you the top tax deductions for every business owner.
Tax Deductions for Business Owners
There is a never-ending chase for business owners trying to minimize their tax bills.
One of the best ways to do this is by using tax deductions. The issue with tax deductions is that business owners aren't educated about what a tax deduction is and how to maximize them.
We are going to break this blog into two areas.
What is a tax deduction?
What are the top tax deductions for business owners?
Let's Dive in.
What is a tax deduction?
The first step in any tax planning is to first understand the end goal. In our case, the end goal is to limit taxes in the current year while also being mindful of taxes in the future.
Often times the best way to do this is through a tax deduction.
A tax deduction is a simple concept that often gets overcomplicated. Here is how it works.
Tax deductions are a business owner's friend, but they need to be understood properly in order to maximize the benefit. The most famous tax deduction for a business owner is buying an SUV over 6,000 pounds. Everyone has seen their friend go to the dealership in December because they could "write it off".
Let's look at what they really mean.
In 2024 you expect to make $1,000,000 in total income. As part of your tax planning, you purchase a new company vehicle for $100,000. How much money does this really save you?
Without Car Purchase:
Income - $1,000,000
Taxes - $294,966
With Car Purchase:
Income - $1,000,000
Tax Deduction - $100,000
Adjusted Income - $900,000
Taxes - $257,966
You have saved $37,000 in taxes and spent $100,000 on a car.
So remember, a tax deduction only reduces your taxable income.
With anything in taxes, the devil is always in the details. Now that you understand the basics let's transition to the top 5 tax deductions for business owners.
Starting with the tax deduction you get for buying a car.
What are the top 5 tax deductions for business owners?
We have all heard of the crazy deductions business owners can get. We are going to focus on the 5 most common deductions and how you can use them.
Section 179 - How do you get a tax deduction for buying a car?
Augusta Rule - How do you get a tax deduction for renting your home?
Qualified Business Income - How do you pay yourself and reduce your taxes?
Home Office - How do you right off home office expenses?
Customer Meals and Entertainment - How do you maximize the tax benefits of client entertainment.?
If you want a better understanding of tax planning strategies before diving into the details check out the Moment Guide to Tax Planning for Business Owners.
Section 179 - Deduct Your Car
We have all heard of the business owner deducting their car. One of the more famous ones is a Mercedes Benz G Wagon which can go for over $200,000. To get this deduction you have to meet two criteria.
The vehicle must weigh over 6,000 lbs.
The vehicle must be used over 50% for business purposes.
Sounds great. You buy this car and save thousands in taxes. Not so fast.
There is one big surprise waiting for many business owners. This type of deduction or write-off is depreciation. The government is allowing you to depreciate this vehicle fully in year one. When you go to sell this vehicle anything above $0 will be recaptured and added to your tax bill.
This can still be a great strategy but it is important to remember deducting your car comes with strings attached.
Augusta Rule - Deduct Rent on Your Home
If you google the Augusta Rule you will be bombarded with TikTok videos of people telling you to buy a multi-million dollar mansion to avoid taxes. Although that isn't possible the Augusta Rule can be an excellent strategy if you use your home in your business.
Originally this rule was created in the 1970's for residents of Augusta Georgia who wanted to avoid taxes on renting their homes during the Masters golf tournament.
Here is what it allows and how you can use it.
The Augusta rule allows you to rent a home for up to 14 days and not report this income. This home can be your primary home or vacation home.
The two most often ways we see this rule used are renting your home for an event coming to town or renting it to your business for a work function.
The two keys to remember when doing this are the following.
Rent must be at market rate.
If you rent the home for over 14 days all income must be reported.
The next time you are looking for a venue for a work event your property might be the most tax-advantageous option.
Home Office Deduction
After COVID working from home has become all the rage. Many business owners have started to wonder if they can write off a home office as tax time comes around.
Look no further because as a business owner, you can deduct your home office. In order to deduct any portion of your business you need to meet the following requirements.
The workspace at home must be exclusively used for business.
The workspace at home must regularly be used for business.
If you meet these two requirements let's take a look at the two methods of calculating the deduction.
Simple Method
The simple method is a basic calculation based on the square footage of the space. You are able to take a deduction of $5 per square foot up to a maximum of 300 square feet.
Under the simple method, the maximum deduction will be $1,500.
This method is typically used for smaller offices that do not have a significant cost to them.
Standard Method
This method can be valuable for those with a more expensive home with a larger office space.
In the standard method, you will need to calculate your office as a percent of your total home.
Example:
Office Square Footage - 2,000 Square Feet
Home Square Footage - 8,000 Square Feet
The percentage you will use is (2,000/8,000) = 25%
This means that 25% of your home cost can be deducted as home office expenses.
There are two types of expenses for the standard method. There are indirect expenses and direct expenses. For indirect expenses, you will receive a deduction proportionally based on the calculation we just completed. In our example, this was 25%.
Here are a few examples of indirect expenses.
Mortgage Interest
Depreciation
Taxes
Insurance
Utilities
The second type of expense would be a direct expense. These are expenses directly tied to your home office. You will receive a 100% deduction of these expenses.
Like anything in taxes, you can make this simple or complicated based on your unique situation and how much work you are willing to put in.
Qualified Business Income Deduction
One of the newest deductions for business owners is called Qualified Business Income or QBI. It was rolled out as part of the Trump Tax Reform. For certain businesses, you are able to deduct 20% of your business income.
Sounds great. Let's see if you qualify.
There are many complexities to this deduction. We are first going to give you a broad explanation and then show you an example.
This is best explained with an image allowing you to see which bucket you fall into.
Let's simplify this with an example. Note this is for educational purposes consult a tax professional before implementing this strategy. Joe is making $1,000,000 in his business and continues to get beat up by taxes. He is trying to determine what he can do to save money on taxes now because he is in the highest tax bracket.
After looking at Joe's tax return it is clear that he is not optimizing his salary to maximize his qualified business income deduction.
Joe is paying himself the following between wages and distributions.
W2 - $100,000
Distributions - $900,000
This will result in a $50,000 deduction for qualified business income. The simplified way to think about this deduction is the lesser of 50% of W2 wages or 20% of distributions.
After reviewing the situation we switch his W2 wages and Distributions to the following.
W2 - $300,000
Distributions - $700,000
This tweak results in a $140,000 deduction for qualified business income which will reduce Joe's taxable income by an additional $90,000.
This alone saved Joe in the ballpark of $30,000 in taxes.
The last element to explain is what a Specified Service Trade or Business(SSTB) is. You will need to determine this to see if you qualify. The easiest way to think about this is to look at your business and ask yourself "Am I the business".
Accountants
Lawyers
Physicians
These are all examples of SSTB businesses. Typically businesses that are not 1 on 1 are non-SSTB businesses and have an opportunity for a large tax deduction.
This is hands down one of the biggest misses we see when doing tax planning for business owners.
Customer Meals and Entertainment Deduction
Back in the 90's you would hear stories about companies writing everything off. Everything from $100,000 golf course memberships to $10,000 client dinners. All of that has changed and many business owners didn't get the memo.
Let's take a look at some of the most common questions we get around this deduction.
Although there have been a few changes in the last few years the two most notable are the following.
Entertaining your clients receives a 0% deduction on any tickets and golf. Those company season tickets are no longer deductible.
Meals with clients are now only 50% deductible after 2022.
Although there aren't as many deductions as there used to be there are still plenty of opportunities to take advantage of.
Tax planning will always favor those business owners who take the time to get educated and they combine that knowledge with the right team. If you are concerned about your tax team or want to get better educated about tax deductions reach out to our team below.
If you are a business owner who is looking to find a financial team that specializes in you, schedule a call, and talk with a Moment founder.
Not sure what questions to ask, check out this video on 10 questions you should ask when interviewing a financial advisor.
Get in Touch With An Advisor
Frequently Asked Questions
Here are some answers to questions I received frequently about this topic.
Are you a fiduciary? Moment Private Wealth serves clients as a fiduciary 100% of the time.
How does Moment Private Wealth make money? We are only paid in one transparent way, by our clients. We receive no kickbacks or participate in any profit-sharing arrangements. Our fees are simple, transparent, and clear for our clients.
How are you different than other financial advisors? We are specialists in working with professional athletes and business owners. We limit the number of new clients we take on. This allows us to provide unparalleled value and highly personalized service to professional athletes and business owners. We work as a team to service our clients. We believe in building a team of “A” players. This ensures our clients receive world-class tax, estate, insurance, and investment strategies. We focus on educating first, then executing.
Where do you hold my investments and how can I see them? Moment Private Wealth uses Fidelity Investments as a third-party custodian for our client investment accounts. As a third-party custodian, Fidelity safeguards and provides reporting to you and the IRS each year. Clients can also access all financial information via the Moment Private Wealth Client Portal.
How do you work with other members of my team? We believe in the power of the team. Our client teams consist of Moment Private Wealth, an accountant, an attorney, a banker, and an insurance specialist. We help our clients build out their team of individuals or work with existing partners clients have. Our goal is to ensure every family has a team of experts to protect their interests.
What is a tax deduction? A tax deduction is your ability to reduce your total income by the amount of your deduction. For every dollar of deductions, you will reduce your taxable income by a dollar.
What does your average client look like? Our clients are nearly all athletes and business owners. Our average client has a net worth greater than $5M. The strategies, solutions, and planning that we implement have a high-net-worth and ultra-high-net-worth client in mind.
How to pay less in taxes as a business owner? Taxes are going to be your largest lifetime expense. Our goal is to help you pay the least amount possible and never leave the IRS a tip. Our team of specialists understands this and works to reduce your taxes today and in the future.
How do taxes work as a business owner? When you own a business you are going to get taxed in two ways. First, you will be taxed as an employee through the W2 wages you take from the business. Second, you will be taxed on the profits that your business earns.
What are the best tax strategies for business owners? The best tax strategies can save you thousands if not millions in taxes. The best strategies will be specific to your needs and goals. Strategies most business owners consider take into account what they expect to make in income this year as well as in future years.
*Moment Private Wealth offers information on tax and estate planning that is general in nature. Tax and Legal advice are not provided by Moment Private Wealth. Consult an attorney or tax professional regarding your specific legal or tax situation.
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