It’s that most terrible time of year - tax time. Small business owners start to worry about their tax bill. To add to the stress, the federal government made a major tax law change that affects pass-through organizations - sole proprietorships and S-corporations among others.
While the new tax rule eliminates one tax strategy, that doesn’t mean other tactics go out the door. There are plenty of ways to save on your taxes.
First, the Crackdown on Crack and Pack
The IRS decided that too many business owners were taking advantage of the 20% qualified business income deduction and put the kibosh on them.
Doctors, lawyers, and other professionals who can work for themselves are considered specified service businesses, which are ineligible for deduction. To get around it, they split off part of the company into one that could legally take advantage of the deduction.
You can guess what Uncle Sam thought about that.
The new rule taking effect this year eliminates the ability to crack your business in two to lower overall taxable revenue for each smaller company, then structure one of those businesses to be eligible for the business income deduction.
Exiting Employees Cannot Return as Contractors
Another tactic engaged by individual employees to lower their tax burden was to leave a company, start their own business, then become an independent contractor at their old company, doing their old job.
Now, the IRS presumes you retain your status as an employee if you do this. Not only do you not qualify for the qualified business income deduction, but you would also still be responsible for all taxes related to running your own business. You would need to file a separate return for your business and pay the self-employment tax.
How You Can Still Save on Your Small Business Taxes
The following tactics have not been ruled out. You can lower your small business tax burden in other ways.
- Make contributions to a retirement plan, right off the top. The self-employed and small business owners have a plethora of retirement planning options to choose from, including contributions to a traditional IRA in addition to a 401(K), or SEP IRA. You can contribute up to $55,000 a year using this tactic.
- Charitable donations are still deductible. You can use a donor-advised fund or donate directly to your choice of organization.
- Take the home office deduction. It is easier to qualify than you think. Home office deductions have become more flexible over the past few years.
- Pay attention to auto expenses. If you use a personal vehicle for business purposes, do yourself a favor and track your business mileage. Deducting the 2018 rate of 54.5 cents per mile can add up. There are plenty of apps to help you monitor and manage your business mileage.
- Hire a family member. You can double the money you contribute to a retirement account, or your new employee will be in a lower tax bracket, so payment for work reduces the overall family tax burden.
Don’t discount carryover tax deductions, either.
Deductions for capital losses, net operating losses, home office deductions, and charitable donations can be carried forward to another year if you can’t take full advantage in this one.
These tips can shave a healthy amount off your taxable income. To make things even easier, opt for tax planning software to help you keep track of everything. The price of the software may be deductible, too.
Any way to save stress at this time of year is welcome. Now, go forth and slay the tax dragon by starving it of taxable income.
About the Author
Jayson Mullin is a partner at Top Tax Defenders, a tax resolution company with over 30 years of experience working with the IRS to aggressively help clients with any type of tax relief problems.