By just following one of these tax tips, you can save $56,000 of tax deductions for your business this year! And if you are married, that number doubles to 112,000 of tax deductions.
How does that sound?
In this lesson, we want to give you the top 5 tax tips for those of you that are making 500K a year or more. We specifically geared this video so that all the tax tips will have the highest amount of benefits if you fall into this range of revenue between 500K to around 1M a year.
Of course if you are outside of this range you can still benefit from some of the tax tips mentioned, but we can create videos for those in other ranges if you are interested.
So let’s start with tax tip #1!
Family Income Splitting Tax Strategy
In Tax Tip #1, we have the Family Income Splitting Tax Strategy. When you are making around 500K, you are right around the highest tax bracket and that is actually the most optimal level to think about how family income splitting would be a huge benefit for your business. So what is the Family Income splitting rule?
It is a tax strategy where you can allocate some of the net profit/income in your family among family members, such as your son, daughter, nephew, niece, uncle, etc. by giving them a position in your company and letting them earn a reasonable salary. For any business with more than 300K in net profit, this can make a huge impact as it can move some of your income that is taxed at the highest bracket to possibly the lowest bracket, netting you immense savings in between.
So things to watch out for:
The IRS is aware of abuse from this tax law as believe it or some business literally hired over 20 members to join their family business..and give them all kinds of odd titles like stamp boy or greeting lady when they have no need for those jobs at all for their business. So what the IRS has done is imposed what they called a kiddie tax.
It limits the amount of unearned income a kid can earn. Now it used to be that you can just pass on income to your kid without them having to do an honest day of work as long as you give them some bogus title in the company or sometimes not even that.
Well congress has cracked down on that.
But it’s fine, as long as you are paying your child for legitimate work you are doing and giving them a reasonable salary (for example paying your 10 year old 30/hr to copy papers is probably going to raise some flags).
But if you do involve some family members and your son is able to take over operations for you, then this is a great opportunity for you to save a lot of money on your taxes.
Michael is an….e-commerce owner making 500K/Year
In Tax Tip #2, We have the Solo 401K. First let’s talk about the amazing Solo 401K plan. THis plan is “solely” created for small business owners that are operating by themselves. You can have up to one business partner with limitations and you can have your spouse working in your company, but that’s it. The crazy thing about solo 401K plans is they operate on a self directed custodian.
What does this mean?
So a traditional custodian is one such as Fidelity or Vanguard that would only allow..
So what makes a solo 401K amazing is the crazy rule that you can contribute as both the employee and employer of the business.
The employee part of the business is called the elective deferral which for 2021 is $19,500 if you are under 50. The employer portion is called the profit sharing and the max you can take $38,500.
So if you add these amounts together you can contribute a maximum of $58,000 to this plan, which is insane as a traditional 401K, say if you work for an employer only allows for 19,500 a year.
And this is why they encourage people to start businesses, these outstanding incentives the government has setup to stimulate entrepreneurship makes it all worthwhile. And get this – if you spouse works for you, this amount DOUBLES!
Yes that means technically you can deduct $116,000 of your income into this solo 401K retirement plan and have it be shielded from income each year! It’s pretty incredible. One thing to keep in mind is the profit sharing plan does have a limitation- if you are sole proprietorship or partnership you are limited to 20% of net income.
If you are an LLC or S Corp, you are limited to 25% of net income. Nevertheless something you definitely want to implement today and now.
EMPLOYER BENEFITS VS. RAISES
IN tax tip #3, Look at benefits vs raises. If you want to save on employer payroll taxes, a valuable employee perk may be the better way forward. The IRS has a guide on what’s taxable and what’s not, but some of the benefits that your employees won’t pay taxes on include:
- Company cell phone
- Up to $50,000 in life insurance coverage
- Some employee meals
- Occasional tickets to sporting or music events
Note that the IRS considers gift cards (even small ones) taxable as income. If you want to avoid additional tax burdens, giving a small birthday gift like a fruit basket may offer tax savings.
Anything considered a de minimis benefit (too trivial or minor to merit consideration) carries no tax burden. Ask your tax professional how additional benefits, like tuition assistance or retirement planning services, can count as expenses during tax time without triggering additional payroll or income tax liability for you and your workers.
Sales Tax Threshold
IN tax tip #4, make sure you pay attention to your sales tax threshold and where you might cross the threshold. As you cross the 500K Mark, you are getting to the point where you are more likely to need to establish sales tax permits everywhere you go.
You should definitely start with your state of residence or where your business is and then the next one you check will be anywhere you have a physical nexus.
A question we get often at the firm is what is nexus? What does it mean?
Nexus is defined as a connection or affiliation to an area that triggers sales tax. That’s all. There are two main ways that you can trigger nexus. One is a physical presence and the other is an economic condition. Here are some common activities that will trigger physical Nexus
- Office, store or other location in a state
- Employee, salesperson, contractor, etc.
- Owning a warehouse or storage facility
- Storing inventory in a state (ie. Amazon FBA warehouses or other 3rd party fulfillment center)
- Having a 3rd party affiliate in a state
- Temporarily doing physical business in a state for a limited amount of time, such as at a trade show or craft fair
After this level you would want to check for what is called economic nexus, that is when you have enough concentration sales in a certain state that would require you to also remit sales tax to that state’s government.
It is important to be proactive here and not wait until that state comes after you as at that point you will have incur penalties and fees and you don’t want that to happen as that is just giving free money away.
So make sure you stay ahead of the game there.
By knowing what’s each state threshold you are more likely to be able to implement tax planning strategy around it and possibly NOT have to pay for certain state’s sale tax if you are able to stay right under it and that’s something we are very eager to always help clients on to make sure they can minimize their taxable liability in the most legal way possible.
Qualified Business Income Deduction
IN Tax Tip #5, we want to talk about something no small business should pass up on and that is the qualified business income deduction (QBI)- QBI is a tax deduction that allows eligible self-employed and small–business owners to deduct up to 20% of their qualified business income on their taxes.
After the Tax Cuts and Jobs Act was passed, the IRS allowed for some business entities to deduct up to 20% of qualified business income, as well as 20% for qualified real estate investment trusts (REITs). This may offer substantial savings when taken in addition to itemized deductions or the standard deduction.
Most sole proprietors, partnerships, and S-corps – and some estates and trusts – qualify for this, but some business services are excluded. total taxable income in 2020 must be under $163,300 for single filers or $326,600 for joint filers to qualify. In 2021, the limits will rise to $164,900 for single filers and $329,800 for joint filers.
Once you are over this limit, the phase out happens and you are very limited to how much you can claim under the QBI. This brings up an important point. You should always try to stay under this taxable limit and the best way to do it is to understand all the available tax deductions so that you can lower your taxable income as much as possible so that you would qualify for this deduction. So don’t forget to do so this year when you are looking at your business and making sure that you are doing the proper tax planning and evaluation to lock down a QBI deduction for your small business this year. 20% is a BIG deal, don’t miss out.