The views of this article are the perspective of the author and may not be reflective of Confessions of the Professions.
If you run a small business, you know that taxes are never fun. However, when it comes to paying tax on your business income, there are some simple rules to follow to reduce the amount of taxes that you need to pay for the year. These little-known ways have been proven time and again so they’re worth a shot before going through the stress of finding deductions other people haven’t discovered yet.
By donating qualified stock to a Charitable Remainder Trust, small business owners are able to take a bit off of their taxes at the end of each year. If a taxpayer gifts or bequeaths QSBS shares to a trust (or someone else), the trustee or receiver gets its own exemption, essentially doubling the tax-free gain.
QSBS Stacking is basically a strategy that employs the doubling of your Qualified Small Business Stock. Here are some ways you can do it:
Exemptions from the QSBS can be obtained by making a gift of stock to your kid, parent, or another loved one. To avoid paying taxes on the first $10 million of gains, you can give away your qualified shares.
This is perhaps the second-most simplest (and, thus, the second-most prevalent) method of making a gift: giving to an uncomplicated trust. A trust can be set up if you don’t want your children to get too much money before they’re old enough or if you only want them to use the money for a specific reason, such as paying for their college education or paying for their wedding. If you’d like to leave a portion of your assets to future generations, you can adopt the simple trust plan.
Self-employed and small business proprietors have the most retirement planning alternatives out of anyone. You can still open a Traditional Individual Retirement Account (IRA) with a $5,500 annual limit for persons who fall into one or both of these categories.
When paired with other retirement plans like 401(k)s and SEPs, you can contribute up to $55,000 per year to an IRA of this kind. You can contribute even more if you’re above the age of 50. Combining a cash balance pension plan with your 401(k) may allow you to save as much as $150,000 annually.
If you’re running a home-based business, you might as well take advantage of the home office tax deductions. Taxpayers in this category can deduct taxes if they use at least one area of their house as a workspace. To qualify for the deduction, your workspace must be dedicated to your business or trade.
If you drive for your small business, you might qualify for a deduction. Some entrepreneurs use a car from their household or one from the workplace to deliver products or make sales. If you drive to a lot of meetings, drop off goods for clients, or transport goods as part of your job, you might be able to claim a mileage deduction.
To do this, you need to keep a record of your mileage per job. If the IRS reviews your tax return at some point and you can’t provide the data, then you won’t be entitled to the deduction.
If you own your own car, you may have to pay for insurance, gas, and maintenance on it as well. You can deduct these outlays as long as they’re related to your business or trade. You can also claim a depreciation deduction for your vehicle if it’s primarily used for business or purchasing goods for resale.
If you’re running a business with your spouse or a parent, you can pay them for their help. This is true even if the work has nothing to do with the business. You can hire them as contractors and pay them tax-free so long as they’re not treated as employees.
If your parents own a business as well and are in good health, you may be able to make an arrangement where one party hires the other family member and pays them in full only when necessary. This arrangement can help the family keep the business in the family.
If you have your own business and you have a child, they can work for you if they are still in school. This is true even if they’re just doing light work like delivery or taking care of the books. In this case, you’re not hiring them but rather letting them do some light labor for business purposes.
While some of these tax deductions don’t apply to your situation, there are plenty of others that do. Go ahead and try out a few of these tax-saving techniques on your business income. If you have any questions about this topic, contact our team for assistance.