“The only difference between a tax man and a taxidermist is that the taxidermist leaves the skin.”
Mark Twain, apparently, wasn’t a big fan of the IRS.
But, like it or not, you have to fill your forms dutifully and pay what you owe to the state.
As a small business owner, you are very well aware that every cent counts, so minimizing your taxes and maximizing benefits can make a big difference to your cash flow.
Given that cash flow is the reason why 82% of small businesses go under, it’s important to do everything you can to reduce your expenses.
Here are three tips on how to leverage some frequently overlooked deductions and maximize your tax benefits.
1. Know Your Common Deduction Options and Claim Them
Many SMB owners don’t know what they’re entitled to when it comes to tax deductibles, thus leaving thousands of dollars on the table every year.
Home office deduction:
If you’re running your business from your home office, then you have a legal right to deduct expenses related to the area of your home used for these purposes. It’s not uncommon for tax preparers to advise entrepreneurs against claiming this deduction, afraid that such a move could trigger an IRS audit.
However, the 2018 Tax reform brought a lot of changes, and one of them concerns home office deduction – by eliminating miscellaneous itemized deductions this new regulation allows you to claim home office expenses only if you’re self-employed.
As an entrepreneur, you’re entitled to a tax deduction on certain car or truck expenses such as lease payments, registration fees, gas expenses, insurance, or repairs. But you should know that commuting to and from work, using your car for advertising purposes, or using your car to transport work-related materials don’t qualify as tax deductibles.
On the other hand, driving from your home office to meet a client does. There are two ways of deducting these expenses: actual expenses and a standard mileage deduction. Depending on your situation, the results of using these two methods can vary substantially, so make sure to crunch the numbers before opting for either of them.
As of 2018, the IRS completely eliminated entertainment expenses from their list of deductibles. It’s good to know that business parties are still 100% deductible. When it comes to business meals, these haven’t been blacklisted, but there are a couple of limitations in this area too.
For example, you need to ensure that the meal doesn’t take place at an entertainment venue such as a nightclub, that it isn’t lavish, and that there are some reasonable expectations that this occasion will result in a business benefit of some kind.
In the light of these latest tax restrictions and stricter limits, it’s not unusual that some entrepreneurs decide to move their businesses to Ireland, the country which has one of the most efficient and business-friendly tax systems in the world.
2. Increase Your Contribution to Your Employees’ Benefits
Another effective way to minimize both your and your employees’ taxes is to contribute more to their retirement or healthcare benefits.
In other words, instead of giving your hard-working employees a $500-raise, offer them to add the same amount to their health insurance plan.
It’s a win-win situation for both parties.
Namely, you as an employer won’t have to pay your share of FICA and Medicare, and you’ll be exempt from paying state and federal unemployment taxes.
Similarly, your employees will benefit from this deal too, because they will save on their income, FICA, and Medicare taxes.
You can choose between a defined-benefit or defined-contribution plan.
Traditional pension plans are a great example of a defined-benefit plan which is based on the number of years in service and employees’ salary history.
A defined-contribution plan means that a certain portion of gross employees’ salaries is directed towards their retirement funds. 44% of private industry employees opted for this type of plan.
Similarly, you’ll receive a tax break for making contributions to your employees’ retirement plans.
These generous tax benefits aren’t the only reason why you should consider increasing your contribution to your employees’ benefits – by doing so, you’ll be able to keep your best employees and reduce your turnover rate.
It’s worth noting that you can additionally benefit by sheltering your money in your own retirement plan as it’s also tax deductible.
This can be a particularly good idea if your income exceeds a threshold of $207,500 for single filers and $415,000 for joint filers as these amounts don’t get the pass-through deduction.
So, by making significant contributions to your retirement plan, you’ll practically reduce your taxable income, find yourself below these thresholds, and thus qualify for the pass-through deduction again.
3. Continuing Education
Although regular seminars and conferences for the general public aren’t tax deductible, these which are specifically aimed at professionals in a particular field who want to learn new and polish their existing skills qualify as tax deductibles.
These work-related education expenses that you can deduct include:
- Travel costs
- Educational expenses incurred as a result of research
- Various materials & resources, such as books, tuitions, or lab expenses
However, for your continuing education expenses to be deductible, they should either improve your job skills or be required by law.
Having your own law firm, for example, requires you to keep pace with the latest regulations and best practices in order to do your job properly.
This means that the costs of courses you take to hone your legal skills qualify for continuing education deduction.
On the other hand, if you decide to learn new skills or a trade, or if you want to start a new career, your expenses won’t be deductible.
It’s true that as an SMB owner you’re already too busy and stressed out even without all the tax filing that you have to worry about. But, learning a couple of things about taxes can help you save significant amounts of money that would be otherwise snatched by those government people that Mark Twain spoke ill of to collect it.