9 Smart Ways How Small Business Owners Can Drastically Reduce Their Tax Bill

If you don’t already own a business, start one. Since the drastic changes made to the tax laws by the Tax Reform Act of 1986, owning your own business has become the best tax shelter available. This benefit is so important that many taxpayers establish sideline businesses primarily for tax breaks.

Smart Way # 1 – Fully deductible business expenses

For the self-employed, business expenses are deductible in full directly from gross income. You can deduct any expenses that are “ordinary and necessary” to run your business, even if they benefit you personally.
Smart Way # 2 – Full home office write-off.

The rules allowing a taxpayer to claim the home office deduction have been loosened, beginning January 1, 1999. No longer does the home office need to be the “principal place of business” for the taxpayer. The home office test can now be satisfied if the taxpayer uses the home office for “administration or management activities” and there is no other fixed location in which the taxpayer performs such activities for his business. The home office still must be used exclusively for business purposes to qualify. This will allow more taxpayers who conduct business outside their office but use their home to perform administrative tasks to qualify for the home office deduction.

Smart Way # 3 – Writing off family medical expenses

This strategy is a little more complicated but is well worth the extra effort. My family saved by deducting over $5,000 in out-of-pocket medical expenses from my business income last year. With two young kids, medical expenses can add up quickly.

To use this strategy, first, you must hire a spouse or other trusted family member to work for your home or small business. Either full-time or part-time status will work. Next, you need to set up and sign a medical reimbursement plan. You may need the advice of an accountant to help you with this. This plan allows any sole proprietor to convert all family out-of-pocket medical expenses into legitimate business deductions. Finally, your spouse or family member pays all out-of-pocket medical expenses for the family, keeping receipts and documenting miles driven for medical purposes. At a specified time, your business reimburses your spouse or family member for these expenses and deducts them as a business expense.
Smart Way # 4 – Writing off your child’s college education expenses

If you frown at the high cost of college education, this tax strategy is for you. If you put your child on the payroll of your business for performing office chores and other business-related tasks, you can pay each child up to $5,700 a year (in 2009), and that amount will be canceled out by the child’s own standard deduction. Your child can pay for or save for his or her college education with the deductible wages you pay, and there will be no payroll taxes for your child if he or she is under age 18.
Smart Way # 5 – Deducting auto mileage to and from your job

Do a few minutes of work for your home or small business before you leave the house for your job and when you return to your house after work. Document this activity (a few e-mail messages, letters, or phone calls) each day in your day planner, journal, or other permanent document, and also keep a written record of your mileage. This allows you to deduct this mileage as miles between jobs (55 cents per mile for 2009).
Smart Way # 6 – Deducting vacation travel expenses

Try to combine business (a meeting with a client or possible client, checking out some material or resources for your business, etc.) with your vacation travel. As long as your trip is documented in advance, showing an intent to build your business in some way, your travel expenses become business expense deductions. Meals, hotel rooms, plane tickets, car rentals, and even certain expenses for entertainment are deductible as business expenses with proper documentation.

Smart Way # 7 – Deducting phone, Internet service, and utility bills

If phone calls, Internet service, or utilities are used for legitimate business purposes, then, with proper documentation, they become tax-deductible business expenses. If you have a credit or debit card solely for your business -and you probably should -the annual fees and interest payments are also tax-deductible business expenses.
Smart Way # 8 – Cutting your taxes when selling appreciated assets

When you are planning to liquidate appreciated assets such as stocks, think twice. Instead, give the actual stock asset to your child or other trusted family member who has a lower tax bracket. When that person sells the assets, he or she will pay taxes at the lower tax rate.

You are allowed to deduct the full value of the assets as a charitable contribution, and neither you nor the organization will pay any capital gains taxes on the assets.

It would be advisable to consult a tax professional or accountant for proper planning and documentation for some of the more complicated tax strategies, but using these strategies could save you thousands of dollars in taxes.
Smart Way # 9 – Tax deduction doubling

The important thing is to plan your tax strategy. For example, if your tax deductions are usually not significantly higher than the standard deduction, then take the itemized deductions one year and your standard deductions in the following year. Why is this a good idea? Simple. You can increase those itemized deductions (e.g., taxes, contributions, losses, etc.) over which you exercise some control by paying/contributing most of them in the deductible tax year. Some people call this technique doubling up. Let’s take a closer look.

  • In the deductible year, pay your year’s charitable contribution for the upcoming standard deduction year in December. This is then added to your regular contribution for the deductible year.
  • For those individuals who exercise control over when they pay their school and property taxes, it is sometimes wise to pay two years’ taxes for the deductible tax year. Make sure that the tax payments are made in the deductible year. Note that people whose mortgage company pays taxes normally have no such flexibility.
  • For the deduction year, sell those stocks that have a loss (owned at least a year and a day) because the government, in effect, absorbs the part of your loss that is equal to your tax bracket percentage times the amount of the loss. For example, assume that your loss on stocks was $10,000 in a deductible year and the tax bracket of your return was 33%; then, Uncle Sam would pay $3,333 of the $10,000 loss. Also remember that losses can offset gains (without a corresponding loss) by $3,000 in any one tax year. The $3,000 loss can be deducted from ordinary taxable income.
  • Donate clothing and any other deductible items in the same deductible tax year.
  • Schedule all elective surgery and, if possible, other medical expenses, into the deductible tax year.

In general, then, for any deductible expense (taxes, contributions, losses, etc.) over which a taxpayer exercises control, it is wise to plan one’s deductions so that they can be fully maximized.

Do You Engage in Tax Planning Year-Round?

Many people worry about their taxes only during tax season. However, you will save a fortune in taxes, legally, if you make tax planning your year-round concern.

Can you make some changes to turn your hobby into a moneymaking business? Can you use that extra room in your house as a home office for your business? Can you arrange to use your car more for business purposes, and have you documented your business use mileage? Can you arrange for more of your entertainment expenses to be business related? Have you listed the business purpose on each receipt?

Do you make business and personal purchases, investments, and other expenditures with tax savings in mind? Do you document your expenses well so that they would survive a tax audit? Whenever you are faced with a business or personal financial decision, do you consider the tax consequences?

Make year-round tax planning part of your business management mindset and thus enjoy maximum tax savings. By rearranging your affairs to account for tax implications, you will save a fortune in taxes. If we can help, please call us at (405) 285-7701 or e-mail at info@mycpateam.com

Changes in tax laws in this country are ongoing. Enjoy the potential tax savings through implementing some of the tax breaks and strategies that I have identified in this report while these breaks exist. Don’t miss the boat (yacht)!!!

“Of course, lower taxes were promised, but that has been promised by every president since Washington crossed the Delaware in a rowboat. But taxes have gotten bigger and their boats have gotten larger until now the president crosses the Delaware in his private yacht.”

Will Rogers, 1928

Danny Mueller & Samantha Plank
CPA Plus+
1708 S. Broadway
Edmond OK 73013
Telephone: (405) 285-7701

E-mail: info@mycpateam.com