The benefits of tax-saving business strategies
Using tax-saving business strategies can substantially reduce the amount of taxes paid by a business.
Maximizing the tax savings requires determining the best tax strategy. Tax-saving business strategies have completely changed as a result of the 2018 Tax Cuts and Job Act. If you haven’t changed your strategy to take advantage of the new tax laws, you could be paying a substantial amount more in taxes each year than you should be.
The 2018 changes created the 20% QBI deduction for businesses. This can reduce your taxable business income by 20%. However, not all business income is qualified for the 20% deduction. The 20% QBI deduction is too involved to be covered in one article and will be covered in future articles.
When determining the best tax-saving business strategy there are several entities to take into consideration. These include the sole proprietor, partnership, LLC, S corporation and C corporation. There are several variables to consider in order to determine which one is best for you.
Some of the factors that you should consider when determining your strategy is the amount of your profit and whether you have other sources of income. Other factors that will impact your strategy are your marital status and whether your spouse has income. Additionally, if you have children, this may also affect your strategy.
A substantial amount of money may be saved by taking advantage of an S corporation. By forming an S corporation, a business owner may be able to substantially reduce self-employment taxes. The owner of of an S corporation does not pay payroll taxes on the profit, which could provide significant tax savings.
As an example, if a sole proprietor has a profit of $100,000, the self-employment (SE) taxes would be about $14,130. By forming an S corporation and taking a reasonable salary of $60,000, it would eliminate the payroll taxes by 40%. This strategy would reduce payroll taxes by about $5,652 ($14,000 x 40%).
Another strategy is having your spouse rent property to you, since there are no SE taxes on rental income.
As an example, your spouse rents a building to you. You pay your spouse $2,000 rent each month. This strategy reduces your self-employment income by $24,000 which reduces your taxes by SE taxes by $3,391 each year.
Hiring your children can provide a tremendous tax savings. The standard deduction for a child is $12,400 in 2020. Any W-2 wages to the child less than the standard deduction is tax-free.
As an example, you pay your child $100 a week. This would reduce your taxable income by $5,200. Consequently, your self-employment taxes would be reduced by $735 and your income taxes would also be reduced. The amount of your income tax savings would depend on your income tax bracket. If you were in the 22% bracket your income tax savings would be $1,144. This would result in a total tax savings of $1,879.
These are just a few of the many possible strategies. Before implementing any strategy, it is important to research all of the details since this article only provides a brief synopsis.
Additional strategy information will be provided in future articles.
David Zubler is a tax accountant and Enrolled Agent representing clients before the IRS with over 25 years of tax experience. He is the author of four tax books and is the founder and president of Your Tax Care. The company provides business and tax education to the public at its website, YourTaxCare.com. David can also be contacted by email at firstname.lastname@example.org