Taxes are likely to be the largest expense you'll have throughout your entire life. In this episode, I will discuss 7 business owner tax strategies which will include:
- Hiring Your Kids
- The Augusta Rule
- Section 179
- General Business Expenses
- Primary Residence Exclusion (Section 121)
- 401k Retirement Contributions
- States with no income tax
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- Hiring your kids as an employee in your business
- What is The Augusta Rule?
- What is the Section 179 tax deduction?
- What general business expenses are deductible?
- What is the Primary Residence Exclusion (Section 121)?
- How can you reduce taxes using 401k Retirement Contributions?
- Which states have no state income tax?
Hiring your kids as an employee in your business
"If you own a business and have kids under 18, you can pay them $13,850 tax-free in 2023, and deduct it from your taxable income. Hiring your child as an employee is a business expense and you can deduct the wages paid to your child from your taxable income, lowering your tax liability as long as they are performing work-related tasks in your business."
"Tasks can include administrative work, managing your social media, or other age-appropriate responsibilities. Your child will owe $0 in taxes as long as the wages are under the individual standard deduction limit which is $13,850 for 2023. This leaves a tremendous opportunity to invest $6,500 of that income into a ROTH IRA, which then grows tax-free and has the potential to be taken out tax-free again down the road."
What is The Augusta Rule?
"This allows homeowners to rent out their home for up to 14 days per year, without having to pay tax on rental income. If you own a business, you can host a team retreat, party, event, or meeting at your home, and rent it out to your own business as long as it is for legitimate business purposes. The rental expense is deductible by the business and the rental income is non-taxable if the home is rented out for less than 15 days."
"If you do decide to use this, make sure to maintain good records, invoice the business, issue 1099 from the business to the homeowner, keep good notes, and document the business purpose or the meeting."
"Here’s an example: Let’s say you rent your home for $500 a night for 14 days, and have your corporation pay $7,000 for the ‘use’. Which ends up being a $7,000 deduction to your business & you pay no tax on the money personally. This reduces your taxable income & also offers tax-free income from the rent."
What is the Section 179 tax deduction?
"The 179 Tax Deduction allows business owners to write off the entire cost of a vehicle used for work (cars, trucks, SUVs, vans, etc.) For tax years beginning in 2023, the maximum 179 expense deduction is $1,160,000. So if your business acquires equipment between Jan 1st to Dec 31st and uses it 50% of the time for your business before the end of the year, you can deduct it under Section 179. Keep in mind if the equipment you are looking at takes a few months to deliver, plan ahead – that way, you can make sure it is available before the deadline."
What general business expenses are deductible?
"One of the greatest things about being a Business owner is you can claim a ton of deductions that salaried employees cannot, such as: • Travel • Supplies • Marketing & Advertising • Vehicle expenses • Home office costs • Rent, Internet & phone bills • Health insurance premiums and Education. And I want to highlight education because investing in your employees is essential, especially if you are looking to one day exit and sell your business, you’ll need the business to not have to depend on you to function. Meaning you’ll need a reliable team to back you up. So paying for classes, workshops, seminars, or designations for your employees to help support their growth path within your business can all be deductible. Just make sure to keep accurate financial records throughout the year."
What is the Primary Residence Exclusion (Section 121)?
"Homeowners can exclude $250,000 of capital gains from the sale of their home and up to $500,000 if married). If you sell your primary residence for a profit, you don't pay taxes on the gain, up to these amounts."
"For example, if you’re married and bought a house for $300,000, and you end up selling it for $800,000, making a $500,000 profit on the sale, that $500,000 is completely tax-free. Just make sure you pass the ownership and the use test here which states you’re eligible for the exclusion if you have owned and used your home as your main home for a period of at least two years out of the last 5 years prior to the date of sale."
How can you reduce taxes using 401k Retirement Contributions?
"As both the employer & employee, you can make contributions from both perspectives, allowing you to contribute up to $66,000 annually in pre-tax income. This leads to significant tax deductions and offers flexibility in many different investment options depending on the plan. As an employee, you can contribute up to $22,500 for 2023. As the employer, you can contribute up to 25% of your profit, allowing for a combined contribution of up to $66,000 in pre-tax income. Investment options can include stocks, bonds, crypto, real estate, or private equity."
Which states have no state income tax?
"Depending on which state you live in you can save on taxes. There are 9 states that do not have a state income tax and I’ll put them up here for you. They include New Hampshire, South Dakota, Washington, Tennessee, Wyoming, Nevada, Florida, Alaska, and Texas."
"Lastly, Remember to run any of these strategies by your accountant and CPA, this is meant to be for educational purposes only so do your homework, and take advantage if you can."