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Does your tax bill totally bum you out? Do you wish there was a way to get more tax savings for self-employed business owners? There is a way! I’m sharing tax savings tips for small business owners.
Here, you’ll learn about my seven tax savings strategies to help you lower your tax bill. After this, you’ll probably feel like a tax savings unicorn! Without further ado, here is my list of tax savings for self-employed business owners:
1. Claim Your Tax Deductions.
Tax deductions are a major player in lowering your tax bill. The way tax deductions work is that they’re deducted from your total revenue, which is all the money your business earns. What’s left are your taxable profits. The more tax deductions you have, the lower your taxable profits, which means that your tax bill will be lower.
If you don’t know what a tax deduction is, check out my blog post Why Tax Write Offs are So Important for Your Business that goes in depth about what tax deductions are, how they work, and how to know if something is a tax deduction. Plus, you’ll want to check out this list of tax deductions that many small business owners miss!
So you might be thinking, This is pretty obvious. Yeah, I’m going to write off my business expenses. But here’s the thing.
A lot of small business owners are letting their tax deductions fall through the cracks.
This is either due to poor record-keeping or by using your personal cards to pay for business expenses. I always recommend that at the end of the year, you scan your personal bank and credit card statements and look for any business expenses you might have missed.
The other tax deductions that slip through the cracks are what I call split expenses. These are business expenses that are both personal and business. A few examples are a percentage of your cell phone bill or home internet if you use them for your business.
The way it works is that you write off the percentage of the expense that is for business. So, if your phone bill is $100/month and you use it 50% for business, then you can write off $50/month or $600 year.
By the way, you can learn more about split deductions here. If you’ve never gone deduction hunting before, check out my mini-training Panic Free Tax Prep, which walks you through how to find those sneaky deductions.
2. Take the Mileage Deduction.
That poor mileage deduction. This is one of these deductions that people always blow off but it adds up to SO much!
The way the mileage deduction works is that every year the IRS sets a mileage reimbursement rate. For 2018, the rate is 54.5 cents a mile. You multiply the mileage rate by your annual business mileage and BAM! That’s your tax deduction.
So, if you drove 5,000 miles for business, you would multiply 5,000 miles by 0.545 and that equals $2,725, which is your tax deduction!
Even though the mileage deduction can give you big tax savings, most people think it’s too much of a pain to track so they skip it. But, there are ways to automate your mileage tracking. My favorite is an app called Mile IQ that knows when you’re driving and automatically tracks your mileage. You don’t even need to turn on the app when you get into the car! All you do is log your mileage as business or personal.
3. See if you Qualify for a Home Office Deduction.
Home office is one of those deductions that people are really scared of taking, even though it provides major tax savings for self-employed folks. If you legitimately have a home office for your business, then you should have nothing to fear. The biggest home office mistake people make is NOT claiming their home office.
A home office is defined as an area of your home used exclusively and regularly for business purposes. Exclusively means it cannot double for anything else. Yes, that means your kid’s playroom is not technically a home office. That also means that your dining room table or couch isn’t going to fly as a home office.
Regularly means that you have to use it on an ongoing basis. You don’t have to use it daily, but you can’t use it once a year and say it’s a home office. It’s all about consistency. If you consistently use your home office once a week, that’s regular.
If you do qualify for the home office deduction then hop on the ride to tax savings glory. Because home office is a biggie.
The way it works is that you can deduct a percentage of your home expenses like your rent, mortgage, utilities, homeowner’s and renter’s insurance, and cleaning costs. The percentage you deduct depends on what percentage of your total home that your home office takes up. If your home office is 15% of your total home, you’ll deduct 15% of these expenses.
The easiest way to figure out what percentage of your expenses you can write off is to measure your the total square footage of your home and your home office. Then you’ll divide your home office square footage by you total home square footage and VOILA! You’ve got your deductible percentage.
Let’s do some mathy math. If our home is 2,000 square feet, and our office is 500 square feet, then we can deduct 25% of all of our home expenses.
25% is a lot! If you spend $3,000 a month on your home. That’s $750 a month, which is $9,000 a year. That’s some major tax savings.
4. Turn Charitable Donations into Expenses.
Here’s the deal. Charitable donations aren’t business deductions. Rather, they’re a personal deductions that you itemize on your tax return. BUT, some people skip itemization on personal deductions because the standard deduction is WAY more than their itemized deductions. And this is going to be even truer this year because the standard deduction has nearly doubled for the 2018 tax year.
What that means is that you’re probably not going to itemize a few $100 donations. So how do you make these donations a tax deduction? By turning them into expenses! If the donation is directly related to your business, then you can deduct it. The trick is that there needs to be something exchanged for your contributions that somehow benefits your business.
The easiest way to support charities and get a tax deduction is to sponsor events or programs. As a sponsor, your information is often listed on promo materials, which means your sponsorship becomes a Marketing expense.
But what if you donate time or services to a charity? That’s deductible, right?
That’s gonna be a big NO. You cannot deduct the value of the time that you donate to a charity. But you can deduct travel expenses, mileage, and other direct expenses related to donating your time to charity.
For example, if you donate time to photograph dogs at your local shelter, you can deduct the cost of the supplies that you purchase, like dog treats and toys. You can also deduct the taxi that you take to get there. But you cannot deduct the value of your time.
5. Contribute to a SEP IRA.
A SEP IRA, which is officially called a Simplified Employee Pension, is a special type of retirement account for business owners and self-employed folks. The reason that SEPs save you money on your taxes is that it’s a pre-tax retirement account. That means you’re NOT taxed on your yearly contributions, which means it lowers your taxable income.
For example, if you have $100,000 in taxable profits and contribute $15,000 to a SEP, you’ll be taxed on $85,000, which is pretty sweet.
So what’s the catch?
Well first, your annual contribution cannot be more than 25% of your taxable income or $55,000. Second, if you have employees you must contribute the same amount that you put into your SEP into their SEP. So, if you have employees, you definitely need to do some math on this. But if you’re a solopreneur, a SEP is a pretty sweet deal.
The other thing to keep in mind is that while your contributions aren’t taxed the year you make them, you’ll be taxed on the money when you withdraw it in retirement. So a SEP is NOT a tax because the tax you pay is deferred.
SEPs can seriously lower your tax liability. Last year, my wife and I saved 40% on our tax payments by contributing the max allowable to our SEPs AND we saved for retirement.
6. Deduct Health Insurance Costs.
Pretty much every business owner knows that paying for health insurance is a nightmare. There are very few affordable options for self-employed folks. But, the good news is that you can deduct your health insurance costs on your taxes.
Now, your health insurance isn’t a business deduction or expense but is a personal deduction. And it’s NOT part of your itemized deductions, which means regardless of if you take the standard deduction or not, you can still write off your health insurance costs.
So the deal with this one is that you and your spouse can’t be eligible for employer-subsidized health insurance. So, if one of you even has the option to get health insurance through a job, this deduction is a no go. But if you’re single or both self-employed, then you can save some serious money.
Also, the amount of this deduction cannot be more than your net profits. So if your net profits are $10,000 and you pay $13,000 for health insurance, you can only deduct $10,000, not the full $13,000. But whateves, it’s still a HUGE deduction on your taxes.
7. Investigate the 20% Pass through Deduction.
Alright, let’s talk about the 20% pass-through deduction that was part of the 2017 tax reform. Depending on the type of business that you have, you may be eligible to write off 20% of your profits. Yes, you could potentially pay taxes on 20% less of your profits, which it MAJOR.
In the most simplest of tax scenarios, it works like this: You have $100,000 in qualified business income, with the deduction you could deduct up to $20,000. And I say could because this deduction has a lot of fine print.
Now, not everyone qualifies for this deduction so you do need to talk to a tax preparer about this to make sure that you’re eligible.
First, you need to be a pass-through entity, which is basically everyone who isn’t a C-Corp. Second, you need to have qualified business income, which is a overly fancy way of saying your business’ net profits. And there are some types of income sources that aren’t eligible for the pass-through deduction.
Lastly, your qualification will depend on your income and type of business. If you earn under $157,000 (or $315,000 if filing jointly), regardless of the type of business you have you’ll probably qualify. BUT if you earn over that threshold, then there are additional considerations that have to do with your industry and if you’re a service based business.
Now, there are far more steps than what I’m going over here. But here’s a resource that’ll help you determine if you qualify for the 20% deduction. From there, you can see what your deduction could be.
So as you can see, there are SO MANY ways that you can save money on your taxes. Combining even just a few of these tips will still give you major savings on your taxes.
I have something super special for you: my Biz Finance Survival Kit. It’s free and not only comes with a tax prep checklist but it also includes four other cheat sheets for your small business. You can download the free survival kit right here!