6 Tax Tips for The Entrepreneur
It’s that time of year again. No, not the “New Year New Me” thing; I’m talking about the overlap between tax planning for the previous year and the current year. The past few months I have immersed myself in the small business / entrepreneurial world of the Rio Grande Valley and have heard the all too common grumblings toward the “Tax Man.” Hey, I’m with you all. As a small business owner, I want to keep as much as possible in my pocket without Uncle Sam protesting that I’m keeping too much. So I thought I’d give you all a few tax tips that could help you going forward.
Disclosure: MyLife Financial, LLC is not a Certified Public Accounting firm nor are any of its representatives Certified Public Accountants. You should seek a tax professional to adjust for any changes in tax legislature.
Contributions to a Health Savings Accounts (HSA)
Healthcare is confusing! You have your HMOs, PPOs, HRAs, and HDHPs; some of you may be reading this and thinking, “what in the world are these?” For the sake of not boring you to death on this blog, I’ll limit this portion to what you need to know. A Health Savings Account (HSA) CAN ONLY be used in conjunction with a High Deductible Health Plan (HDHP). Ideally you want to use this if you’re the type of person that hardly gets sick, visits the doctor a few times a year, you know… in good health.
The Benefit: When you contribute to a Health Savings Account, you not only side step federal income tax, you also sides step payroll tax which is 15.3% of your net business income. So if you’re in the 25% marginal tax bracket, you could save up to 40.3%! (Contribution Limits Apply) The added bonus to using an HSA is that it is tax-free to take the money out in case of a qualified medical expense and if you save enough, you can even invest it to keep up with the cost of healthcare going up!
Retirement Plan Contributions
This tip is a no brainer. I usually get asked by small business owners that have had a good year, “what should I do with my extra money?” Do your future self a favor, save some of it. Forgo the extravagant vacation, the hunting / fishing trips, and/or shopping spree. As much as some of us love what we do, we can’t work forever. Retirement accounts also come in different shapes and sizes so be sure to talk to an investment adviser to see which one best suits you.
The Benefit: Depending on the retirement account, you can defer taxes for the amount you contribute and let it grow tax-deferred as well. Ideally when you receive the distribution of these funds, you will be in a lower tax bracket because you’ve retired ultimately paying lower taxes on these funds.
Standard Mileage vs. Actual Expense
Have a car and use it for business? Then you have a business expense on your hands that reduces your tax bill. If you’re a veteran small business owner, you’ve probably wrestled with this one, or at least your CPA has. If you’re a new business owner, then you may want to know the difference. If you use your car for business, the IRS allows you to take the actual expenses you pay for things such as gas, oil, maintenance & repairs, tires, insurance, depreciation, etc… OR the standard mileage rate which is $0.54/per mile in 2016. Which one should you use? It depends. If you drove a lot this year (excluding home to office commute) to perform services, you may be better off taking the standard mileage rate. If you had more expenses, then the actual expenses may be beneficial. Either one you choose, you will need to keep good records of mileage and/or expenses.
The Benefit: As a business expense, deducting mileage or actual expense reduces your business income which in turn reduces the amount of self-employment taxes and federal taxes you need to pay.
Home Office Depreciation Deduction
The home office depreciation deduction is one of the most common deductions for the small business owner. After all, home is where it all starts for most of us. The IRS has some very strict rules on exclusivity when using part of your home as a deductible expense. I won’t bore you with them here but there is an added benefit to claiming the home office deduction. You get to deduct part of your utility bills that keep your office running as well.
The Benefit: Much like the vehicle expense deduction mentioned above, your home office and the portion you deduct for utilities reduces your business income which in turn reduces your self-employment taxes and federal taxes you need to pay.
Save Your Receipts
Good recordkeeping is key to not driving your CPA or Enrolled Agent nuts and keeping the IRS off your back. Whether you are new or are a veteran entrepreneur, set a schedule daily, weekly, or monthly to scan all your receipts and categorize them. I’m a big fan being paperless. I remember the days my father kept his archives in those metal filing cabinets. Before we knew it, we had to section off a part of our living space for them. The IRS has given some guidance on how long you should keep documents, 3-7 years depending if you are claiming a deduction or loss for your business.
The Benefit: You keep your CPA, Enrolled Agent, and the IRS happy; they’re all important if you’re an entrepreneur.
Seek Out a Tax Professional
The most important tax tip for EVERY entrepreneur is to find a tax professional. You are good at what you do and if your core business is not preparing taxes, outsource it.
The Benefit: You will maximize your business’s tax deductions, SAVE A TON OF TIME, and have peace of mind that they’re done correctly.
MyLife Financial is a fee-only financial advisory firm providing objective and independent advice virtually. Our clients are busy professionals that face daunting questions of how today's financial decisions will affect their long-term financial success. Everything written is strictly for informational use only. Please seek the advice of your CPA, Attorney, or financial professional before implementing any strategies.
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