Discover 10 tax hacks for business owners to lower taxable income, including QBI optimization, donor-advised funds, and strategic financial planning. Learn about renting homes tax-free, high-income tax strategies, and maximizing deductions with pass-through entities.
Optimizing Qualified Business Income (QBI) deduction can yield significant tax savings for high earners through strategic wage balancing.
Donating appreciated stock to donor advised funds provides tax-efficient charitable giving by avoiding capital gains tax and receiving deductions for current market value.
Bonus depreciation offers immediate tax deductions on asset costs, benefiting businesses by lowering tax liabilities and enhancing cash flow.
Deep dives
QBI Optimization
Qualified Business Income (QBI) deduction allows for a 20% deduction on business income, benefiting high earners with potential savings of tens of thousands. The deduction is optimized by balancing wages paid by the business to meet the wage test, ensuring maximum benefits. This strategy, often underutilized by accountants, presents significant savings potential for high-income individuals.
Donor Advised Funds
Donating appreciated stock to donor advised funds offers a tax-efficient alternative to cash donations. By gifting appreciated stock, individuals can avoid capital gains tax on the stock's appreciated value and receive a deduction for the current market value without recognizing the capital gain. This strategy allows for effective charitable giving while maximizing tax benefits.
Bonus Depreciation
Considered the 'eighth wonder of the world,' bonus depreciation allows upfront deduction of asset costs, reducing tax liabilities immediately. By accelerating depreciation on assets like machinery or property, businesses can lower current tax obligations and enhance cash flow without fully recognizing future depreciation expenses. This strategy offers a valuable tax-saving tool for businesses.
Megabackdoor Roth
A tax-efficient strategy primarily available to solo-entrepreneurs in lower tax brackets, Megabackdoor Roth enables contributions of up to $66,000 annually to a Roth IRA. By structuring income as salary and leveraging employer-matching contributions, individuals can maximize retirement savings and tax benefits through strategic financial planning. This method ensures effective utilization of retirement planning options.
Fringe Benefits
Utilizing fringe benefits effectively allows for tax savings on business-related expenses, transforming personal expenditures into deductible business costs. These benefits encompass various categories including vehicle use, home office expenses, healthcare plans, and professional development, enabling business owners to maximize tax efficiency by converting personal expenses into deductible business expenditures. It offers a strategic approach to financial management and tax optimization for businesses.
Mitchell says that small business is the best tax deal in America, and in today's episode he expalins why! He outlines 10 ways business owners can take advantage of tax credtis, deductions, legal entities, and investment vehicles to lower their taxable income in the business and on their personal returns. Some of these hacks are simple, others are complex, so if you need advice on whether you qualify and how to implement them, reach out to Mitchell's accounting firm Baldridge Financial in the links below.
Mitchell's ongoing Twitter thread on tax savings and personal finance:
