Small Business Tax Loophole #: Elect Subchapter S Status
Do you own a profitable small business? One that pays you not just a reasonable wage but then a nice chunk more?
The very best small business loophole available to you is probably the Subchapter S election.
Too often, accountants discourage their clients from using this loophole. But thats a shame.
What a Subchapter S election does is allow a regular corporation or a limited liability company to split the business profit into one chunk that is subject to employment taxes and another chunk that is not subject to employment taxes.
The taxes you save? The portion of your profit on which you avoid paying the 15.3% self-employment tax or the 15.3% Social Security and Medicare tax.
Example: A one-owner sole proprietorship operating as an LLC pays roughly a 15% employment tax on his or her profits. On $100,000 of profits, for example, the proprietor pays roughly $15,000 in employment taxes. If the owner makes a Subchapter S election, he or she only pays the 15% tax on the chunk of profits that specifically get called out as wages. If the wages amount equals $40,000, this means the Subchapter S election saves roughly a 15% tax on the other $60,000, or $9,000 annually.
Tip: Im rough in my math in the paragraph above to keep the discussion from getting too nitty-gritty, but you can refer to a longer, denser article here.
What About Other Business Expenses
Depending on the nature of your business, there may be other expenses you can claim on your tax return.
The IRS deems a business expense to be tax deductible if it is ordinary and necessary. Meaning, it is an expense you would incur ordinarily in the course of conducting business, and it is necessary for your business to operate.
When in doubt, remember this guideline, and hang onto the receipts attached to any business related expenditure. That way you can double check with your CPA to confirm what is, and what isnt, tax deductible before you file your return.
You may be tempted to get creative with tax deductions. Instead, focus on strategic tax planning for better cash flow management. The world of business expenses is full of grey areas, and it can be easy to overstep the boundaries set by the IRS. As always, talk to your CPA or tax adviser before claiming any expenses on your return.
Write Off Lunch Meetings
If you often have working lunches , you might be able to deduct 50% of meal expenses.
If you meet with partners, employees, or business contacts, consider meeting over lunch. As long as the dining expenses are reasonable, you are allowed to deduct 50% of meal costs when eating with business partners and employees while conducting business operations.
So, if you buy lunch every day and spend around $8, you can deduct $4. If you do the math, that amounts to over $1,000 a year in claimable deductions.
Struggling to keep track of your business expenses? Accounting software is deductible, too, if it is used for your business.
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Track Every Receipt With Software
Thorough recordkeeping and receipt tracking are how small business owners take advantage of every possible deduction. Disorganization could mean you’re paying far more taxes than you need to. However, adequately tracking hundreds of slips of paper can get tedious, messy and overwhelming, so small business owners should invest in software that keeps every receipt tracked, stored and organized. It’ll be much easier to find proof of expenses come tax season, potentially saving you hours and hard-earned dollars. Catching every single deductible expense is the key to saving money, so invest in a piece of software that takes the burden of recordkeeping off of your shoulders.
Nick Drewe, Wethrift
Tax Loopholes For Truly Small Businesses
Tax season is often a dreaded time, especially if you arent the type to keep up with your business finances throughout the year. If you also dont fully understand tax deductions and tax loopholes that small businesses are eligible then well, youve got lots to learn.
Thankfully, weve got you! Made up of solopreneurs, entrepreneurs, or a small team, truly small businesses are just like small, medium, or large-sized businesses. As a business owner, you should still make the effort to fully understand the tax loopholes available. Dont worry, its all legalyou just might not know about them.
Whether you choose to file early or last minute, the choice is entirely up to you. After all, its all about knowing what you know, and not knowing what you dont know.
Curious to see where you might be missing out? Pay less tax by taking advantage of these tax loopholes this year:
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Rent And Depreciation On Equipment And Machinery
If you lease equipment or machinery for your business you can fully deduct these costs. This can be anything from printers and copiers, to vans and trucks. You can also claim depreciation on equipment and machinery. However, these costs must be deducted over several years. In order to do this, you must claim a Section 179 deduction, which allows business owners to deduct up to $1,020,000 from new or used property in service during the tax year.
The Benefits Of S Corporation Status
S Corporation status can be a major money saver for small business owners who are already operating successful and lucrative businesses. An owner of an S Corporation can split total business profit into wages and dividends. Business owners can set wages for themselves and their employees at Fair Market Value and pay the remainder of profits in the form of a dividend, which is not subject to the 15% payroll tax.
For example, if an S Corporation makes $100,000 per year in profits, but pays out only $40,000 of that profit in wages, the Corporation saves $9,000 annually by not paying the 15% tax on the remaining $60,000 paid out in dividends.
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Families First Coronavirus Response Act
The Families First Coronavirus Response Act required certain businesses to provide paid sick and family leave to employees who were affected by COVID-19 through March 31, 2021. Businesses that made these payments are eligible for tax credits for 100% of the cost of sick-leave pay, family-leave pay, qualified healthcare plan expenses and the employers share of FICA payroll taxes for sick-leave expenses they incurred under the FFCRA. If you qualify, remember to claim this tax credit for the first quarter of 2021.
Tip: Work with a tax professional to make sure youre calculating your business taxes correctly and in accordance with the latest rules.
Using These Tax Deductions For Your Small Business Can Save You Money
It’s simple: The more small business tax deductions your business can legitimately take, the lower its taxable profit will be. In addition to putting more money into your pocket at the end of the year, the tax code provisions that govern deductions can also yield a personal benefit: a nice car to drive at a smaller cost, or a combination business trip and vacation.
So, it’s advantageous to pay careful attention to IRS rules on just what isand isn’tdeductible.
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Outsized Charitable Donations Under The Canadian Tax Code
Charitable donations are a common way to reduce tax bills, but what if for each dollar you give, you receive a receipt for four times the amount of the donation? Through a series of complex offshore maneuvers, gifted trust arrangements meted out $175 million in charitable receipts to about 6,000 taxpayers. This little-known but intensely scrutinized program involves only a few select charities that receive income streams over 20 years from a percentage of donations parked in a hedge fund. Despite CRA warnings, the organizer of the trust arrangement maintains that the strategy holds up against any legal wrangling. These shelters, such as Donations for Canada, offer a potential tax avoidance strategy, but its wise to proceed cautiously, as regulations may change.
In The Coming Weeks The Us Senate Will Move Forward With The Build Back Better Act Including A New Tax On Small Business
Thanks to the action of NFIB members, many harmful small business policies were successfully removed from earlier versions of Congress Build Back Better Act.But now,the U.S. Senate is reportedly ready to consider a revived Build Back Better Act in the coming days. To finance this spending plan, those at the bargaining tablehadagreed to include a new 3.8% tax on passthrough businesses,also known as the Small Business Surtax,wronglycharacterized as closing a loophole to help fund Medicare. Currently, the Senate has paused negotiations that include tax policies until further inflation data is released, however, the tax increase proposal is likely to return in future legislation.
This plan to implement this new tax is a direct attack on Main Street when they can least afford it, said NFIB Vice President of Federal Government Relations Kevin Kuhlman. With excessive inflation, high gas prices, worker shortages, and supply chain disruptions, a tax increase incorrectly masked as closing a loophole or funding Medicare is not only problematic, but it will further destabilize the small business economy. Congress should immediately reject this anti-small business provision and NFIB will actively work against its passage.
Some claim that small business owners do not pay Medicare taxes, but all employers pay Medicare taxes in the form of payroll taxes on their employees wages and self-employment taxes on their own compensation.
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Small Business Tax Loophole #: Avoiding State Tax Nexus
Heres a question: Have you ever thought a particular state hits you or your business with too heavy a tax burden?
If you answer this question yes, you should know that its often possible to either avoid state tax nexus or to sever state tax nexus and then simply not pay income taxes to the state.
You probably need to consult a tax accountant for help doing this, but the basic principle to understand is multistate apportionment.
In a nutshell, states look at the property, payroll and sales you have within a state to determine first if you owe them income taxes and then, if you do owe them taxes, to apportion a chunk of your profit to the state so they can tax it.
You can therefore avoid state income taxes by avoiding owning property in a state, by avoiding having employees or independent contractors in a state, and by avoiding having sales in a state.
The weird part about this is, some employees who reside and get paid in another state dont create nexus. And some sales in another state dont actually count as sales in that other state.
For one example, federal law says a state cant say youve got nexus if youve got a sales person merely soliciting orders for sales of personal property.
And heres another example: You having a customer in another state doesnt mean necessarily that you have a sale in another state. If you ship the product from your home state location and dont do anything else in the other state, your home state may get to count the sale.
What Tax Deductions Can Small Business Owners Write Off
If you run an online store, putting some of your profits toward tax-deductible business expenses can help your business grow and give you a break come tax season.
Even day-to-day expensescar trips to the post office or the electricity bill for your home officecould be saving you money, so long as theyre reported in your small business accounting records.
9 key write-off categories you can deduct from your qualified business income this tax year:
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Small Business Tax Resources
Here are some additional resources for learning about taxes:
- The Small Business Administration maintains a guide on navigating the tax code and staying up to date on your tax responsibilities as a business owner.
- The IRS website has information about how the Affordable Care Act affects small business owners taxes, although the policies are subject to change.
- If you can choose which state your business will operate in, then you may want to consider the small business tax rates by state. Additional information and recommendations are available at the Tax Foundation.
- The SBA has a helpful guide on choosing the right business structure if youre just starting your business this year.
- The IRS website has additional details on the Small Business Health Care Tax Credit, which provides a tax credit to small businesses that offer healthcare coverage to their employees. You can learn if youre eligible and how to calculate and claim your credit.
- The IRS maintains an information center on self-employed and small business taxes.
Do I Need To File A Tax Return If My Small Business Hasnt Made A Profit
Regardless of whether your small business is profitable or not, you still need to file a tax return. As an entrepreneur, it can take some time for your business to start and make money. If you have experienced a net loss in a particular tax period, you may be able to apply that loss to your other income to offset your total tax liability.
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Bonus Tip: Take Advantage Of Small Business Tax Credits
One effective way to maximize your tax refund as a small business owner is to apply for every tax credit you qualify for. Tax credits are offered by the IRS to incentivize businesses for completing certain objectives, such as hiring a veteran, setting up a retirement plan, providing child care services to your employees, or installing an energy-friendly system.
Tax credits directly reduce your tax burden, as opposed to tax deductions, which reduce the amount of your taxable income. Visit the Business Tax Credits page on IRS.gov for a list of credits that may be available to your business.
Use Your Cellphone And The Internet For Business
Lets say you use around 30,000 minutes per year on your phone, for both personal and business reasons. You spend around 60 minutes a day on business calls for the average workweek. Thats around 15,600 minutes a year you will spend on business calls more than 50% of your total yearly phone minutes.
Based on the figures in this scenario, you could deduct more than 50% of total annual personal cell phone costs as a business expense.
The same goes for your internet bill. You can deduct the cost of the percentage of your use that is devoted to business.
Obviously, this is a pain to document.
It would be smart to get a separate business phone number that routes to your phone, making incoming calls easier to separate and document. Assuming a $100-per-month phone bill and a 50% deduction, you could save an extra $600 in deductions.
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Defer Income To Reduce Tax This Year
Tax rates are always changing. As a small business owner, if you dont already have pre-existing knowledge of accounting, taxes, and/or finances in general, its important to:
- Get educated as soon as possible, or
- Hire a qualified accountant who can guide you in the right direction.
Deferring income either at the beginning of the year or at the end of the previous year is one of the many tax loopholes that small business owners can take advantage of in order to reduce their business income for the year. This, in turn, reduces the tax they have to pay as well.
Of course, this relies on a number of factors such as projected income or losses and future tax rates. By reducing the current taxes you pay this year, you are essentially deferring some of the income you expect to receive in the months of December 2019 to January 2020.
PRO TIP: Track your total income to get a clear idea of how much money you can defer for tax purposes. With accounting software, you can easily navigate to view and export key documents such as the Profit & Loss Statement, which is synonymous with the income statement. Understanding your businesss numbers can help you make a decision as to how much income you can defer this year.
How Do I Apply For Cca On The T2125 Form
If you are the sole owner or member of the partnership, you can apply for a CCA on line 9936 of form T2125. Canadian companies can also apply the ACC to vehicles they have purchased for business purposes in the relevant section of the T2 companies tax return. The CAA calculation is the same for corporations, individual owners and partners, and the same CCA classes and rules apply. This calculation must be indicated in area A of the form.
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Incorporation And Succession Plans
By incorporating your small business, you can distribute shares of your business to family members or to a trust set up for their benefit. The primary objective of an estate freeze is to avoid significant capital gains levied when the owner passes away. If your timing is early enough and you expect your business to grow in value, the companys increasing value is attributed to shares the trust holds. At the same time, the value of the shares representing ownership interest freezes, or technically stays the same. This arrangement limits the amount of your capital gains tax as a small business owner and exempts family members from large amounts of taxes when you sell your business or pass away.
Deferred Taxes For Financial Firms On Certain Income Earned Overseas
5-yr Cost to Government: $29.9 billion
Who benefits: Any financial firm with foreign operations.
Because most financial firms conduct their foreign operations as branches rather than as subsidiaries, as most companies in other industries do, they do not benefit from the tax breaks afforded to foreign subsidiaries. To compensate, this loophole enables financial firms to treat income from their foreign branches as if they were subsidiaries, along with all of the attendant tax benefits.
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