If all of your cash is trapped in an IRA, then you might be forced to have your IRA buy your next business. This is powerful if done correctly, but is disastrous if you aren’t super-careful (one mis-step and the entire value of the IRA is now taxable to you). Alternatively, if you think your life will be simpler by holding the business in your name, then you can withdrawal the funds needed to purchase the business from your IRA and offset that income by the losses generated by the immediate depreciation of the of the purchase of the business assets.
If you are a sole-proprietorship, all of your profit is subject to the 15% self-employment tax. If you gift 50% of your business to your spouse who isn’t working in the business, then suddenly that 50% share is no longer subject to the 15% self-employment tax (if your spouse meets certain conditions). In addition, you will enjoy a substantially-diminished risk of audit since partnerships are audited far less often than sole-proprietorships.
Have an employee in college? Reimburse up to $5,250 of that employee’s college expenses and avoid paying FICA tax on that reimbursement-compensation. In addition, that employee will not need to count this $5,250 as income. In rare circumstances, this also works for your non-dependent children over 21.
You can form a small business HRA and reimburse your employees up to $10K/year of their medical insurance and expenses. For example, if you pay your employees a wage of $50K, consider paying them $40K plus up to $10K of medical expense reimbursement. You will save your share of the FICA tax on the $10K (savings of $765) and the employees won’t pay FICA tax or income tax on the $10K. This works well for businesses that are owned and operated by a husband and wife only.
If you have a spouse that has employer-sponsored health insurance, then you are one of the lucky ones. For all other business-owners, you will have to choose between traditional health insurance, a Christian based healthcare sharing ministry, or a short-term medical plan. There are pros and cons to each of these choices. If you decide to choose traditional health insurance purchased from Healthcare.gov, then you will need to try to keep your adjusted gross income below a certain level so that you qualify for subsidies (the government pays part of your health insurance) – we can help come up with some ideas (contribute to an HSA, make a Traditional IRA contribution, etc.) to help you lower your adjusted gross income.
If you are a sole-proprietor and you own the building where your business is located, consider gifting the building to your spouse while keeping the business in your name. This allows you to pay your spouse rent that can be deducted from your business profit in order to save self-employment tax on your business profit.
The commercial building that you purchase for your business is generally depreciable over 39 years…but anything not permanently affixed to the structure or land is depreciable over 1, 5, 7, or 15 years. In the year you purchase the building, make sure to assign a value to anything that is not structural so that you can expense that value more quickly. This savings-idea applies to rentals as well.
You can deduct the full cost of your cell phone (even though you have some personal use) as a working condition fringe benefit. Don’t forget to deduct your home internet as well. You can take these deductions even if you don’t maintain a home office.
If you plan to convert your personal residence into a rental property, consider first selling the home to your S Corporation. You can avoid taxes on the sale with the home-sale exclusion of up to $500,000 and potentially increase the rental property’s depreciable basis, which provides for a greater depreciation deduction over the life of the rental. If you don’t sell the home to your S Corporation and instead just convert it from personal to rental-use, then you will lose the $500,000 home-sale exclusion if you rent it for more than 3 years, and you can only depreciate the historical cost of the home rather than the higher fair market value of the home.
You can take the home office deduction if you have an area of your home that is used exclusively for your business, as long as other supporting tests are met. The home office deduction is only about $1,500…that isn’t a big deal. The big deal is that the presence of the home office means that you no longer have non-deducible commuting expenses…meaning, you can now deduct the cost to get back and forth from your home to your main office. In addition, you can directly deduct any improvements you make to that space – so if you install new blinds in that office, you can deduct the blinds, or if you install a new floor in that space, you can deduct the new floor.
If you rent that home to others, then make sure that you spend no more than 14 days on the property for personal reasons (days spent on repair, furnishing, management, or upkeep don’t count as personal as long as you spend 4 hours and 1 minute during the day on repair, furnishing, management, or upkeep) so that you can deduct 100% of the expenses of that home.
If you live in the home (i.e., have more than 14 days of personal use of the home), then make sure that you conduct business for your small business in that location. That makes your home and travel to the home an ordinary and necessary business expense which might be deductible.
You can deduct travel if the primary purpose of the travel is business-related. Example: Small-business owners go to Hilton Head to work on business plans and review business reports because the location was “appropriate and helpful” in accomplishing that work. As long as 4 hours and 1 minute of each week-day is business-related, then the entire cost of the trip can be deducted to some degree. …and, if you conduct business on Friday and Monday, then the sandwiched-weekend does not need to be business-related in order to deduct weekend lodging and meals.
Other potentially-deductible business-related travel: Travel and visit a customer or prospect each day of the trip to deduct that day’s travel expenses. Or you can spy on a competitor, study architecture of the city for an upcoming office remodel, sample food of the destination-city if you are in the food business, attend a convention or seminar, or cruise to Europe to attend a seminar or visit a client.
If you purchased a desk for personal purposes and then started using it in your business, you can start depreciating the value of that desk. Identify any personal assets that are now used for your business to gain a depreciation deduction on that asset: desk, cell phone, printer, trailer, computer, supplies, equipment, etc.
You can choose to take money from your S Corporation in 2 ways…as a wage and as a draw (i.e. return on equity). You pay 14% more tax when you take the money as a wage because Social Security and Medicare taxes must be paid on a wage, while money taken as a draw is free from this 14% tax. The IRS requires you to take a “reasonable wage” from your S Corporation if your S Corporation is sufficiently profitable. You should aim to set your S Corporation wage on the low end of “reasonable” in order to minimize this 14% tax.
You cannot deduct clothing costs if that clothing is “adaptable to street-wear”. There is an exception to this rule for any clothing with your business logo on it. So, if you want to buy a $300 coat and expense it, then simply put your business logo on it.