If you are paying taxes you are making money – HIGH FIVE!
Now just because you are making money and thus pay taxes on that money, doesn’t mean you shouldn’t exercise every tax deduction available to you. So while, yes, you make money, and you need to pay taxes, we will cover a few options on how you can lower that tax bill. But let’s start with what one thing you should not do…
I’m talking about increasing expenses to report a loss on your business. The number of times small business owners talk or post on social media about going shopping so they can increase their expenses in order to lower their tax liability at year end…
Remember when I mentioned financial temptation in the “Why you need a budget” post? This temptation can be at its strongest at year end. Sure that new Apple product would be amazing to own, but do you need it for the vitality of the business?
Further, I’m sure you didn’t start your business so you could report a loss because we can agree the purpose of running a business is to drive and maximize profit?
That’s the goal here at The Wellness Bookkeeper.
Well, maximizing profit comes with paying taxes.
And I’m completely cool with that.
When you decide to make purchases at year end to report a loss, you are essentially spending a dollar (aka your Profit) to save a couple quarters (aka your Tax Liability).
And I want to urge you to work to change that mindset because it’s limiting and crippling and will ruin your business.
Instead, prepare your business by placing money aside for taxes and in lieu of playing dodgeball with the tax man, let’s shift your focus towards building the healthiest, most profitable business.
You can achieve this by adopting Profit First principles in your business. I will delve deeper into those principles on a later post. If you can’t wait until then, I strongly recommend purchasing the book, “Profit First” by Mike Michalowicz. Here is the link on Amazon.
Now, I promised some tax advice and here are some recommendations:
LIFETIME LEARNING CREDIT:
If you have a thirst for learning and enrolled in any program/course at an IRS “eligible educational institution”, you may be eligible for the Lifetime Learning Credit. Providing a credit for up to $2,000/annually, it can be claimed for any courses taken to improve your job skills. As an added bonus, and at the time of this writing, there is no limit on the number of years you can claim the credit. Learn more here.
529 Plan can be established for your children, which provides a saving opportunity for future education expenses. Now, there is no federal tax credit for contributing to a 529 Plan, however, the growth of these funds are not taxable AND when college comes, and you use those 529 Plan funds to pay for college, you do so without incurring a tax liability. Additionally, 30 States offer full or partial tax deductions for those contributions. Check out the specifics here.
Earlier this year, I read an article in Forbes that states 34% of entrepreneurs have no retirement savings plan. YIKES! Let’s work together to decrease that percentage. You can save for retirement by establishing a SOLO 401K; SEP IRA; or a SIMPLE IRA. A Solo 401K is an option for you the solo business owner and your spouse. A SEP stands for “Simplified Employee Pension” and allows business owners to contribution to Traditional IRAs for their employees and themselves. Here is the breakdown on SEP Plans. Lastly a Simple IRA allows employers and employees to contribute to traditional IRAs. Business exercising Simple IRA must employee no more than 100 people. Here is how the IRS breaks down Simple IRAs.
Check out my blog post “Should Your Business Be an LLC or an S Corp” for more details. But if you are driving profit over $50K and your an LLC, the S Corp could be a great match for you.
If you’re ready to ensure your business’ financial health with The Wellness Bookkeeper, schedule a complimentary consultation or subscribe to the Newsletter!