Business Tax Deduction 1: Set up a Business Entity Structure
Entity structuring can be confusing and overly complicated. At Mazuma, we found that setting up your business as an S Corp can be the most tax-efficient because S Corps usually pay the least amount of taxes.
We always check with our clients to see if they qualify to structure their business as an S Corp. If you structure your business as an S Corp, you, the business owner, have to be on the payroll and you have to pay yourself a reasonable salary .S Corps don’t have double taxation like C Cops do, so the only thing that is taxed is the salaries the shareholders take. So, as the business owner, you only pay social security and Medicare taxes on the salary you take out. Other business entities require you to pay taxes on your total profits and on any salary you take.
Changing your business entity to an S Corp can result in $5,000-10,000 in tax savings.
Business Tax Deduction 2: Automobile Expenses
If you are using your personal car for your business, then you should be taking business tax deductions! Automobile tax deductions are especially helpful for realtors and insurance agents because those professions require a lot of driving. There are two ways you can get automobile tax deductions.
- Mileage: The IRS offers a standard mileage deduction for business owners. The mileage deduction is based on the number of miles driven for business, but the cash value of the deduction changes from year to year. A lot of people overlook or forget about mileage deductions because it isn’t tracked on a monthly basis, like other bookkeeping tasks. Instead, mileage is reported at the end of the year. However, you should always be keeping track of your mileage so you can take the deduction. You can learn more about mileage deductions in our post, What Are My Mileage Deduction Options?
- Actual Costs: Instead of taking the standard mileage deduction, you can add up all the expenses included in using your car for business and deduct those on your taxes. The actual costs include gas, insurance and repairs that you pay for throughout the year. If you lease your car, you can also deduct your lease payment. If you own your vehicle, then you should depreciate the vehicle, typically over five years. In the end, you’re getting a lot more than just gas expenses deducted. But, you must keep track of all of the expenses you want to deduct, which can be a lot of work.
The auto deduction can save you $3,000-8,000 in business tax deductions.
Business Tax Deduction 3: Retirement Plans
We’re going to focus on the SEP-IRA. While a SEP-IRA is very inexpensive to set up, you will want to meet with a financial advisor to cover your bases.
Your business is the contributor to the SEP-IRA. Companies can contribute 25% of the employee’s compensation or up to $54,000 a year. The only catch is that the company has to contribute the same rate for all employees.
If you set up your business as a S Corp, then a SEP-IRA is a great option. Because you are an employee with a salary, you can have the business contribute to your IRA. You can still set up a SEP-IRA even if you don’t have an S Corp. LLCs and Sole Proprietors can have SEP-IRAs, the requirements are just different.
All of the money you put in your SEP-IRA counts as a business tax deduction, so the savings depend on your contributions. However, you will have to pay taxes on that money when you pull it out of your retirement account.
Business Tax Deduction 4: Self Employed Health Insurance
For non-business owners, health insurance costs and medical expenses are only deductible when you do an itemized deduction. The problem with that is, in order to deduct any insurance or medical expenses, the total you spent must exceed ten percent of your adjusted gross income. Which makes it hard to qualify for.
However, if you are self-employed you can deduct 100% of your insurance costs and medical expenses on your taxes, without itemizing. This isn’t a business tax deduction, it’s a personal tax deduction that only applies to business owners. There isn’t a threshold you have to meet for this deduction like there is for non-business owners. This only applies to people who purchase insurance. If you use a health share ministry, which is exempt from the marketplace fines, then you can’t deduct it because they aren’t considered premiums.
Business Tax Deduction 5: Previously Personal Expenses
When you own a business, you use a lot of personal items for your business. Normally you wouldn’t get a tax deduction for personal expenses, but because you own a business, and use these items for your business, they are now deductible, The following items all qualify as previously personal expenses:
- Computers and equipment
- Office expenses
- Home Office
These expenses won’t get you a huge deduction, but all together they can add up to a few thousand dollars each year. While the savings are still moderate, it’s still well worth the time to count them.
Bonus: Plan Ahead to Pay Taxes
While no one enjoys paying taxes, but it’s a simple fact that if you make money, you must pay taxes. There isn’t a way around it. If you are doing your best to take advantage of all the business tax deductions you can, then you need to have a plan for saving money to pay your taxes.
Six to eight months before you file your taxes, meet with an accountant to determine what you’re going to owe in taxes. At Mazuma, we like to schedule a tax discussion call with our clients. We look at how much money you’ve made and what you plan to make for the rest of the year. Then we look at what tax deductions you’re going to take advantage of. Once we know all of this, we can determine how much you’re going to owe in taxes.
A tax discussion is also helpful so that you aren’t surprised when tax season rolls around and all of a sudden you owe the IRS a big chunk of money. Instead, you can put money aside throughout the year so that you’ll have plenty of money to pay the tax man.