Tax Deductions For Business Owners and the Self-Employed

Ensure the Financial Success of Your Business

Starting a new business on your own can be both intimidating and rewarding at the same time. Hopefully with a solid business plan and proper guidance those stepping-out on their own will be successful — and as any experienced business owner or investor knows, it’s not just what you earn, but how much you can keep after tax. To make this process a little easier, here are some basic tax considerations a new business owner should take into account.

S-CORP ELECTION

Pay yourself a “fair” salary

If you are the owner of a successful business that elects to be taxed as an S-Corp, there are significant advantages once you reach a certain threshold of income. Let’s say that your business has a net profit of $100K for the year — the IRS would allow a portion of those earnings (let’s say $40K) to be exempt from self-employment taxes (15.3% federally). Keep in mind, however, that you still have to pay income tax on the income that flows through to your personal return.

COMMERCIAL + RESIDENTIAL RENTAL PROPERTIES

Take advantage of depreciation

The idea of investing in a rental property is nothing new. Real estate has historically retained its value well over the years with the exception of a few areas in the wake of the mid-2000’s housing crisis. The tax is relatively low on your rental income — as a passive investment, the profits are not subject to self-employment taxes. Furthermore, rental property owners are allowed to deduct a non-cash expense called depreciation. Residential buildings are depreciated over 27.5 years and commercial buildings over 39 years — so the former category gets a higher deduction for the depreciation. Notwithstanding all the tax benefits of owning a rental property, it should also be mentioned that the IRS basically forces you to take the depreciation expense because if you sell your building at some point down the line, they decrease your cost basis by whatever depreciation you have claimed at that point. This concept of “depreciation recapture” can be avoided by doing what is called a 1031 exchange and can get a bit complicated.

Under Section 1031 of the code, a taxpayer can defer the realization of capital gains and associated federal income tax liability on the exchange of certain types of property. This means that you can save yourself from paying capital gains tax on your asset value gain if you buy another property. From the time you close on your sold item, you have 45 days to find an applicable property, and then another 135 days to acquire the replacement property.

TAX DEDUCTIONS ON YOUR PERSONAL RETURN

Invest in your state’s AMT-free municipal bonds

While interest rates are still quite low by historical standards, these investments may make sense for high earning individuals. The interest income (but not capital gains) you generate from the bonds are exempt from taxation. Calculate your tax equivalent yield to determine whether investing in your state’s AMT-free municipal bonds make sense.

SEP IRA

At the time of this writing, the IRS is allowing people that are self-employed to save up to $56K per year for retirement. You can then deduct your contributions from your taxable income, thereby deferring the taxation.

INVESTING FOR THE HEALTH OF IT

For those interested in becoming self-insured, the tax code offers a nice incentive. In combination with a High Deductible Health Plan (HDHP), individuals are able funds that are not taxable if the proceeds are used for qualified medical expenses. These HDHP contributions are deducted from your taxable income on your return.

For those who are self-employed, but need money to be more readily available — there’s a way. The IRS allows business owners to deduct their health insurance premiums as an adjustment to income.

KEEP UP WITH ESTIMATED TAXES

A major misstep many new business owners make when starting out is failing to plan well for their end-of-year tax bill. This is especially a problem for individuals leaving work as an employee where their income tax was withheld by their employer.

In order to avoid making this mistake a small business should pay estimated taxes to the IRS if it expects to owe taxes of $1,000 or more for the year ($500 if you operate as a corporation). Not only will paying estimated taxes help you avoid IRS penalties, they will prevent (at least some of) the sticker-shock when you file your tax return.

An Effective Strategy Ensures A Successful Business

Effective Business Strategies You Should Employ

Are you occasionally perplexed at how some companies seem to effortlessly out-perform others? Or why some just can’t be overcome? If a company wants to stand a chance in a competitive industry, business owners must create and act on a sound business strategy.

Companies like Amazon have been successful for years and have been able to expand because their strategy is succinct with their vision. Amazon is known as the most customer-centric company in the world. They accomplished this through the meticulous creation of a seamless customer experience where people can search and discover almost everything they need online.

What Is a Business Strategy?

A strategy is a multi-tiered timeline of planning that enables your company to reach specific goals and envisions the future in which you will thrive. It is also a practical tool set that outlines the types of products or services you plan to build, as well as the customers who you are focusing on serving to make profits.

A solid strategy has verified and validated assumptions that can be presented as fact and built upon — there must be a strong understanding of the environment and market in which you plan to thrive. The strategy must be in alignment with the objectives and vision, and if those elements aren’t set in place, they must be. For example, Google’s vision is to provide the best internet experience to users. Now it is common nomenclature to “just Google it.” Every service and creative act that Google provides are in alignment with their core objectives.

Strategies help you in every aspect of your business from making investment decisions, how to prioritize projects and other activities within your organization, as well as optimize resources to generate above average returns.

Things to Consider

Specific and Long-Term Objectives | The plan must be long-term and realistic. Think about what type of products/services you want to create. Who is your end user/consumer and what markets access these people?

Opportunity | Carefully analyze the current opportunity that presents itself as well as how it may develop over time. Collect facts and data points that reveal the reality of your assumptions and be open them. Look for opportunities that may be contrary to your original ideas.

Innovation | Make sure that the products or services that you plan to provide are differentiated and aligned with the possibilities and capabilities of your business.

Competition | Study the competition and make sure that your strategy still keeps you competitive. Find the market that is either not served or underserved and be the first to capitalize.  Then you can capture the market share, build your brand and make it very difficult for others to compete or even enter.

Economies of Scale | Keep your costs of goods/services low while remaining innovative. Create unique features to offer and maintain high-quality customer service.

Time to Market | Carefully evaluate your “build versus buy” options for the products and services you plan to provide. It may be cheaper to outsource certain aspects of your business to a third-party vendor who has already assumed the risks and startup costs.

Testing | Continually review and update your strategy to make sure that you are not only on track, but that your plan stays relevant considering the constant and rapid change of technology, local and global economies, and consumer interests. Don’t be afraid to test out theories and ideas cheaply to ensure their validity.  

Risks and Failures | Factor in risks and create room for your organization to accept failures. Collect insights gained from personal and observed success and failure to learn from and improve your future.

Stakeholders | As soon as the plan is finalized, it is important to share it with collogues and employees to get everyone on the same page. It is crucial that guidance is offered to explain the reasoning behind the decision-making and how these initiatives apply to their positions. If applicable, it is also important to create a similar but separate plan to share with other more external stakeholders like investors, partners, and suppliers. It will be necessary for them to understand the paths of future or shifting revenue impacting shareholders. 

It is never too late to create and implement a realistic and effective business strategy. If you are having trouble knowing where to start or how to take your company to the next level, you may want to consider contacting specialists.