6 Best Tax Write Off's for Your Small Business
This guide might show you an additional $58,000 in direct write offs without spending a dime, and show you how to reduce your self employment taxes by $6,000 a year.
Business owners usually dislike tax time, and one thing that drives them crazy is the thought that they're missing out on big tax deductions.
Small business owners hear stories of Donald Trump, Amazon, and other companies paying remarkably low taxes, and we wonder what they know that we don't.
I want to help you identify a couple of really big write offs that you might be missing, and some often overlooked ones.
- Maximize the S-Corp
- Business mileage
- Home office deduction
- Cell phone & internet
- Prepay bills
- Retirement plan funding
To demonstrate, we will use a made-up scenario to show how these tips can help save thousands of dollars in taxes. While we're a Des Moines Iowa CPA, we specialize in serving as an accountant for pressure washing companies, accountant for general contractors, or a tax accountant for Tile Contractor. If you're a pressure washing entrepreneur, take a look at our 12 Insane Tax & Growth Hacks for Pressure Washing Businesses
We also have our Profitability Tracker for Pressure Washers that's worth it for any new pressure washing contractor looking to track profitability.
Scenario: Clarence is a small business owner with income of about $75,000 of net income. He runs an engine repair company and is not aware of the following tax savings items below
1 - Maximize the S-Corp (HUGE DEAL)
When you maximize the S-Corp, you'll often save thousands in taxes each year.
In fact, it's not uncommon for us to identify $4,000 - $8,000 a YEAR in self employment tax mitigation for folks taking home net profits of $60,000 to $200,000.
The key is to Maximize the S-Corp, obey the law, and abide by the bureaucracy.
We believe you should aggressively work to maximize the tax savings functions of an S-Corp, and that's what we do for our clients throughout the year.
Remember, tax savings are direct bottom line savings, and impact your bottom line SIGNIFICANTLY.
If we save you $8,000 in taxes this year, and you run a 15% gross profit, we essentially created $53,000 in sales.
The bottom line is that an S-Corporation can provide significant benefits, such as reducing audit risk and reducing self employment taxes.
The catch is that you won't be able to take as large of employer-side profit share in retirement plans, and you'll need to keep up with the bureaucracy.
Luckily, the savings of an S-Corp is often so large that it will fuel your business growth. When we combine the S-Corp with retirement plans, you can drastically improve the tax efficiency of your wealth.
If you're serious about building up your business, you owe it to yourself to schedule a no-cost analysis of your tax return with us to find out if you can lower your taxes.
2 - Business Mileage
In 2021 the IRS will allow a deduction of $0.56/mile driven for business purposes with your personal car.
Most people are not great with calculating their mileage. These are not miles driven to and from your home and office, but other miles with a business purpose. For example, trips to clients, suppliers, training events etc. can all be deducted. By not including these costs, you could be missing out on some serious tax savings!
Clarence had multiple trips to get additional parts for his business to help repair engines. He actively tracked the miles he drove for business and totaled up 3,500 miles during the year.
3 - Home office deduction
The IRS allows a deduction for the office that you use in your house. A business owner that exclusively uses a room in their home for business can get $5 per square foot as an annual deduction. This deduction does max out with rooms at 300 square feet but provides a great deduction to small business owners who are working from home with their main business or running a side business!
Clarence had an office in his house used exclusively for quoting clients and meeting with customers daily. His office was 20ft x 10ft and was used exclusively for business purposes.
4 - Cell phone & Internet
Most businesses these days need to have a cell phone number and internet to perform properly. Without these essential pieces of technology your business would not be able to operate effectively. Small business owners can allocate costs based on business use to their business from these monthly plans. This can add up to serious tax savings throughout the year.
Clarence used his cell phone and internet exclusively for business purposes. He paid the utility companies one payment of $150 per month for phone service and internet.
5 - Prepay Bills
There are many companies that offer discounts for pre-paid items if the items are paid for the entire year. Insurance companies typically give a rate decrease for paying for the entire year in advance. Small business owners are typically accounted for using the cash basis of accounting meaning when the money leaves your account, you get to record the expense.
Clarence purchased general liability insurance for his business in November for $2,000. The insurance was to cover all of the following year, so he had recorded a pre-paid expense and included it on his balance sheet.
6 - Retirement Plan Funding (HUGE DEAL)
Government wants businesses to provide retirement plans and benefits, which means congress has passed laws to provide tax advantages for them.
Did you know that you could write off up to $58,000 (changes each year) a year in SEP IRA contributions to yourself (with all sorts of limitations)?
A retirement plan contribution within your small business can be the largest tax deduction possible (in some cases).
There are 2 situations that play into your retirement plan strategies:
- Do you have statutory employees?
- If so, will they value retirement plan contributions?
Business owners often avoid unnecessary headaches, which causes them to ignore the power of a retirement plan.
Retirement Plan Options for Solo-prenuers, without Statutory Employees:
- Individual 401k or Solo 401k (Vanguard & Schwab have good options)
- SEP IRA
- Defined Benefit Plan (pension)
Retirement Plans for Companies WITH EMPLOYEES
- Regular 401k
- SIMPLE IRA
- Sep IRA
- Defined Benefit Plan (complex)
The biggest thing to understand is that if you have employees, you cannot bias your retirement plan contributions to yourself.
Each retirement plan has criteria that would apply systemically in order obey the law and get the tax advantages.
Summary for Solopreneurs without Employees
(THIS IS NOT LEGAL ADVICE, and is intended for conceptual advice only. Consult with us please and things change each year according to congress)
- SEP IRA for Sole Proprietorships: Use a SEP IRA to Contribute up to 25% of your Sole Prop's net income as a direct write off, not to exceed $58,000
- SEP IRA for S-Corporations: Use a SEP IRA, and contribute up to 25% of your S-corp's salary as an employer contribution not to exceed $58,000
- Solo 401k for Sole Proprietorships: Contribute up to 25% of net income as an employer side, and up to 100% of net income up to $19,500 in employee side 401k contributions not to exceed $58,000
- Solo 401k for S-Corps - employer contribution cannot be greater than 25% of s-corp salary, and employer 401k up to $19,500 not to exceed 100% of income and combined cannot exceed $58,000
For businesses with employees, you'll probably go one of 3 ways:
- a 401k where you'll commit to match up to around 4% (safe harbor) of employee salary contributions & deferrals
- a 401k where you pick a flat percentage of salary for all employees, and make a profit share contribution. up to 25%, not to exceed $58,000 (subject to congress)
- SIMPLE IRA where employees can put up to $13,500 (2021) in salary deductions, and you'd generally match up to 3% of their salary contributions.
- SEP IRA where you pick a percent of salary, up to 25%, and you contribute that percent identically to all employees, but limits are at $58,000 (changes each year)
Our government wants to encourage businesses to provide retirement planning and benefits, so they provide tax benefits.
If you use these tools in your compensation packages, you'll find some really juicy tax deductions.
Total Tax Savings for Clarence
1. Mileage: Clarence had 3,500 business miles. This added $1,960 of additional expenses.
2. Home Office: Clarence’s home office is 200 total square feet. He gets an additional $1,000 in deductions for that space.
3. Cell Phone & Internet: Clarence’s utility bill that he pays personally totals $1,800 per year. He can deduct all of that.
4. Prepay Bills: Clarence prepaid his business insurance for the following year. This saved him money each month as well as gave him an additional deduction in the current year of $2,000.
5. Retirement Plan Funding: Clarence knew that putting money away for retirement would help benefit him in the future, but it also gives him a $12,000 deduction for the year.
These additional deductions helped lower Clarence’s tax liability significantly. He went from owing around $25,000 for federal taxes to reducing his tax burden to around $16,500. He was able to save nearly $10,000 in taxes!
This is just one example of many helpful ways to save on taxes. Here's another resource we found from Stride that discusses the top 10 1099 deductions.