One of the best reasons to start a new business is to be able to move some of your personal expenses under your business umbrella and make them deductible. This is not an article about tax evasion. This is about using the tax code to your advantage to minimize the taxes you owe.
We spend a lot of time with clients helping them learn of available expenses for their particular business, how to recognize them, how to categorize them and where to deduct them.
But there might be another way to look at this. So, here is an exercise for you.
Make a list of your current personal expenses. We all know about expenses directly tied to your business, but what about those that are indirectly tied.
So, you might look at your list and ask, “How could this be a taxable deduction?:
You’re probably aware of using the home office to deduct part of your rent or mortgage or utilities, especially with the increase in the standard deduction. Mortgage interest and taxes are no longer deductible for many on the schedule a but they may be partially deductible as a home office expense.
Likewise, some of your mileage is likely deductible if you have a business.
But look at your list of other personal expenses and ask, “is there a way to make this or that deductible”
Here’s a few examples of what might be:
- You give your child an allowance. For many people, that might be linked to chores. But you can also link that money to an age-appropriate job that is properly documented for your child. Place some or all of that money in an IRA or an UGMA or a 529 plan. Voila, you’ve just made home expenditures deductible. This can be a big deduction as you can pay your child up to their standard deduction without them paying taxes or even FICA in some instances.
- What about health insurance? If it’s not provided by an employer of either you or your spouse, you may be able to make it a deductible business expense.
- What about combining business and personal travel?
- Do you help support your parents? Hire one or both of them
- Do you have a vacation home? Rent it out for a few days a year
- you may be able to hire a child or family member and provide an educational assistance plan
- Maybe you can rent out your house to your business?
- You can make bigger retirement plan contributions if you have a profitable business.
These are not things you bring up while you’re having your taxes prepared. Some of these will require pre-planning and certainly good record-keeping.
Need some help with your small business? Give AFS a call at 303-745-3962