Being self-employed has its advantages, especially when it comes to tax planning. There are numerous tax and retirement planning strategies you can employ by integrating certain aspects of your personal lifestyle into your business finances.
First, a quick disclaimer. It is very important to discuss any of these strategies with your CPA, financial advisor and/or tax advisor before implementing them. It’s important to know what will work best for your specific financial situation, as well as what you can and can deduct in your tax returns based on your business.
Now that we got that out of the way, let’s look at three of the most effective strategies for making your existing personal lifestyle deductible in your business.
If you are self-employed and have a spouse, consider hiring him or her as an employee of your business. There are numerous benefits to this concept that go beyond just having someone else to help with your business activities. From a retirement planning standpoint, you will be able to defer more money into your 401k accounts. You have limits as to how much you can contribute each year as an individual. Your spouse will be able to take a maximum portion of his or her income and put it into their 401k separately, which increases tax-deferred earnings.
For tax deductions, there are plenty of reasons why it makes sense to have a spouse as an employee—especially if you travel a lot together.
• Travel Expenses
• Meals & Entertainment
• Social Security Benefits
• Health Insurance
Now, there are some downsides to hiring a spouse that will include additional payroll, Social Security and Medicare taxes that will have to be paid along with each paycheck. Therefore, it’s a matter of finding the right salary point that will net you the most tax savings.
Another idea is to hire your children under the age of 18. They will not be subject to Social Security or Medicare taxes. Under the Tax Cuts & Jobs Act, a person can earn up to $12,000 in wages without having to file a federal tax return. State filing laws will vary.
When you have your own business, it’s worthwhile to make sure there are some business activities happening anytime you travel. Be strategic about your family vacations and find ways to establish a business purpose for each trip. Why? Because you may be able to deduct a significant portion of the expenses. Carefully document the time spent on business activities versus personal time.
If more than 50% of your trip entails business activities, then your flights are actually deductible. Otherwise, you can still deduct a percentage of the travel expenses as long as a significant amount of the trip is spent on business activities.
This is a very creative tax strategy and you definitely want to be careful with how you implement this idea. How it works is that rental income is tax-free if you rent out your principal residence less than 15 days per calendar year. This rule is designed for people who will occasionally rent out their home on rental websites when they are out of town.
If you have a corporation or LLC, however, you can rent out your home to your business a few days each year. It could be used for off-site strategy meetings or other clear business purposes. Your company would write a check to you personally for the rental. You can determine a fair daily rental rate by researching rental websites for homes of similar sizes.
Ultimately, your company would be able to write off the rental as a business expense while you will be able to collect the rental income tax-free as long as you do it less than 15 days a year. It is very important to track your business activity carefully. Keeping very accurate business meeting minutes is a good place to start in order to show that the rental was specifically used for business purposes on the days in question.
As mentioned in the beginning, it’s smart to discuss these strategies with your financial advisor, CPA and/or tax advisor before implementing any of them. These may be ways to help reduce your taxes without changing one thing about your life or they may not be beneficial to you at all. Everyone’s financial situation will be a little different based on their finances, personal lifestyle and business configuration.
For help with all your wealth planning and tax strategies, count on the team at Illumination Wealth. Contact us today for more information or to schedule a no-obligation financial consultation.