By Ben Kinsey, CPA
|Image courtesy of Pixabay|
In my previous blog, Do the Right Thing & Save 20%, I covered the new tax laws in effect that allow many businesses to capitalize on deductions that apply to overflow income (business income minus your salary). The only rub is this deduction specifically excludes professionals. That’s the bad news. The good news is in today’s blog I will reveal how realtors, accountants, doctors, dentists, CPAs, engineers and any other business owners that provide a service may still have an opportunity to capitalize on this 20% deduction.
On the other hand, depending upon the amount of income you and your spouse collectively receive, you could potentially miss out on this deduction if you are unaware of the new tax laws. Below are three considerations you need to take into consideration if you hope to beat the tax man at his own game:
1. You can and should shelter some of your income through a Health Savings Account.
2. You should also maximize your contributions to your IRA or 401K plans.
3. You need to consider the income your spouse makes. (If you make $200K and your spouse makes another $200k, you’re probably going to be out of luck with regards the 20% deduction.)
That being said, if you would have consulted with your CPA and found out how to max out some of your legitimate deductions at the beginning of the year, you probably could have saved 20%. The problem is, there’s no way you can wing this kind of tax planning or wait until the last minute if you hope to guarantee it’s going to work. You need to do a best guess of your income at the beginning of the year if you hope to create a plan that can shelter the amount of income necessary to qualify for the 20% deduction.
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Once the plan is created, the second most important factor is to adhere to the plan without exception. While you could get lucky, odds are you will wind up shooting yourself in the foot if you wait too late to enact a plan. Particularly if you (and your spouse) are making a lot more money this year than you did during the past year or so, you need to act now if you want to claim a tax deduction that was meant for the middle class. To stay in the middle class, you have to make less than $350,000 as an individual, or $400,000 as a married couple on paper.
Other than HSA’s and IRA’s, there are other investments you can make as a professional to shelter some of your income. The problem is, your bookkeeper isn’t going to be able to tell you about them. Neither are some accountants. It takes an experienced tax planner help you find ways to shelter your income. Here are a few of them:
1. Depreciation is your friend – There are ways of putting in $50,000 to generate $100,000-$200,000 worth of depreciation. This is another one of those tactics where you can’t pull the rabbit out of your hat at the end of the year if you want it to work.
2. Charitable deductions are not the answer – While being charitable is noble, it doesn’t affect your gross income. So, that big check you’re planning on writing to charity is not going to help you qualify for the 20% deduction.
3. Buying a building is another way to shelter income. – If you’re currently paying rent, why not consider paying rent to yourself instead of to your landlord. This one move could help you not only shelter your income this year, it also allows you to depreciate the building for an additional 29 years.
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4. You can also shelter income by repairing an existing building you own. The only caveat is that the repairs have to both be completed and paid for by year end in order to qualify. They also have to be a leasehold improvement made to the interior of a non-residential building. They can neither include any expenses relating to enlarging the structure, nor can the expenses relate to an elevator, escalator, or the internal structural framework of the building. (For more details on the laws pertaining to the purchase or repair of a building, refer to my previous blog entitled Building Your Future by Buying a Building.
5. Change your corporate structure - If you own an LLC or Subchapter S corporation and expect to make a huge amount of money this year, you might want to consider changing your corporate status. C Corps only pay 26% in Florida. If it looks like you are going to pay higher taxes in an S Corp or LLC, consider changing your corporate structure.
6. Buying equipment or vehicles for the company – Depreciable assets is the number one way for a business to shelter income. If you expect a big wave of income, the best time to buy equipment is now. If you wait until next year, the tax deduction you need this year won’t be there for you.
What it boils down to is that professionals can capitalize on the same 20% deduction as other business owners if they plan ahead to maximize their use of legitimate tax shelters that can reduce their gross income.
Ben Kinsey, CPA of Small Business Group works with owners of closely held corporations in the Northeast Florida region. If you work in the North Florida area we offer a FREE initial Consultation at our office, please contact Small Business Group if you would like to know more about strategies for your business.