The taxation landscape can often be a daunting terrain for small businesses. Understanding the nuances of tax law and identifying possible deduction opportunities can help businesses keep more of their hard-earned revenue. In episode 25 of the Ms. Biz podcast, special guest Mike Jesowshek came together to dissect several tax saving strategies aimed at helping small businesses thrive. This illuminating conversation covered a wide range of topics, including carving out business deductions, retirement planning, optimal entity structure, real estate investing, and guidelines for recruiting family members.
Maximizing Business Deductions
One of the key strategies highlighted in the podcast centered around the idea of getting the most out of your business deductions. These expenses can reduce your taxable income, as they are both ordinary and necessary for the operation of your business. Common examples include travel expenses, meals, home office expenses, and more. Properly tracking and documenting these expenses can help businesses efficiently write-off these costs as pre-tax business items, offering the advantage of reducing the total tax payable.
Retirement Planning
Retirement planning for small business owners was another significant topic that came under the microscope. It was emphasized how Solo 401ks and Simplified Employee Pension Plans (SEPs) can serve as potent saving devices. These retirement plans permit business owners to make more substantial contributions to their retirement, in a tax-deferred manner. Thus, not only do these plans cater to your golden years, they provide immediate financial benefits by reducing your tax risk in the present.
Choosing the Right Entity Structure: S-Corp
The structure of your enterprise plays a crucial role in dictating your tax liabilities. One such structure that was under discussion was the S-Corporation. Incorporating your business as an S-Corp can notably reduce the amount of self-employment taxes you would otherwise be obligated to pay. This happens because S-Corp allows you to represent part of your income as a dividend, which is not subjected to self-employment taxes.
Real Estate Investing as a Tax Mitigation Tool
For small businesses that dabble in real estate, depreciation deductions and short-term rental losses can be a beneficial tax tool. These two factors can greatly offset the taxable business income, thus lowering the total amount of tax due.
Hiring Family as a Tax Saving Grace
Another intriguing strategy that was brought up revolved around hiring family members. By hiring relatives and accurately documenting their work hours and salaries, businesses can earn deductions. Furthermore, family members earn income that could potentially be tax-free up to the standard deduction amount.
Being Audit-Ready
While adopting these tax savings strategies can significantly impact a small business’s bottom line, it’s vital to be prepared for a potential IRS audit. Review your business’s structure and implement meticulous tracking practices, including: documenting mileage and preserving receipts, amongst other things, to avoid trouble with the IRS.
In conclusion, navigating the world of taxes need not be an uphill battle for small businesses. By leveraging these tax saving strategies – from maximizing deductions and investing in retirement plans, to choosing the right business structure and capitalizing on the advantages of real estate investments – small businesses can step into a more tax-efficient future.