Most business owners probably don’t have backgrounds in finance. However, that doesn’t mean they can afford to avoid doing the administrative tasks that come with running a company.
You might face a massive variation in the cost of goods and services. A $100 million agency that sends $90 million out the door on projects can’t afford to pay $15 million in salaries. Rent, supplies and other overhead costs also affect the bottom line. Business owners who shy away from financial management typically run into unnecessary challenges come tax season.
1. FAMILIARIZE YOURSELF WITH SECTION 199A.
Section 199A in the new tax law offers a big perk for small businesses. Whether it helps a lot or a little depends on how your agency operates. For those unfamiliar with what Section 199A embodies, it gives taxpayers deductions for qualified business income. This should come from a qualified business or trade operated solely through a “pass-through” entity — essentially, a business structure used to reduce double taxation effects.
The main draw of Section 199A is the 20% deduction that agency owners can take on income. For some, like consultants, the law caps the benefit of this deduction. For others, the limit does not exist.
Today, most agencies, regardless of size, operate as a blend of full-time employees and contractors. Section 199A rewards companies with the right number of W-2 employees, but that number changes depending on the structure of the agency asking.
Wages are not the only factor that affects Section 199A eligibility, though. Talk to your accountant before you start making new hires to cover the gap.
2. MAXIMIZE THE AUGUSTA RULE FOR YOUR HOME OFFICE.
The Augusta Rule, named for the golf course of PGA fame, allows a person in the United States to rent his or her home for up to 14 days per year without paying taxes on the income. For agency owners, this presents intriguing opportunities when it comes to finding a meeting space.
Say you have a standing engagement with an out-of-town client once per month. If you use your home office to conduct business, you can rent the house to your business for fair market value up to 14 days every year. You, as the owner of the property, do not have to declare the income received from your business for those 14 days of renting.
Home offices aren’t freebies, though. If you want to take the deduction, ensure you have a space in your home dedicated exclusively to work, and operate in that space for a day or two every week. Document everything (pictures of the office included) in case the IRS comes knocking.
3. GET A TAX STRATEGIST, NOT JUST AN ACCOUNTANT.
Accountants fill out the blanks in the forms. Strategists help organize your business to extract the maximum value from deductions throughout the year.
A tax strategist, for these purposes, is essentially a CPA who specializes in helping businesses create strategies ahead of time as opposed to a tax preparer who handles financial decisions already made by a business owner.
Find a tax strategist who can advise on how to pay less in taxes without stepping over the line. For example, why not hire your kids for $6,000 a year? Put them to work on a few weekends (i.e., cleaning the office, filing papers, proofreading, etc.); pay them a fair wage, and then let them foot the bill when summer camp rolls around.
Tax strategists can also help make the most of your health care options. The medical expense reimbursement plan, for instance, allows some companies to pay medical expenses for employees and receive dollar-for-dollar deductions. If you make $100,000 and need a procedure that costs $20,000, the first $7,500 would normally not be deductible. With a strategist-approved medical expense reimbursement plan, however, you could deduct every dollar.
4. CONSIDER THE FUTURE OF ENTERTAINMENT.
Small business owners with season tickets took a hit when the new tax law eliminated deductions for entertainment expenses. If you had a season pass to the opera and used that access to woo clients, your mezzanine seats suddenly became a partial liability.
Entertainment providers don’t want to lose dollars from businesses, though, so many of them are considering new ways of classifying their products. Season tickets might not be deductible, but what about sponsorships that happen to include tickets as a perk? Rather than mourn the loss of entertainment deductions, reach out to those partners and see whether you can work something out.
But remember: The IRS is no fool. If you try to get around the rules illegitimately, the tax collector will come calling, and he probably won’t knock first. Communicate with your tax person early and often to stay on the same level.
These tips are just one taste of savings you could see right now. Why wait until next year to start? Use this information, and the advice of your new tax strategist, to keep more money in your pocket.
Call Scott A. Kunkel, CPA PC today in North Richland Hills at 817-498-1040 to have a chat about your real estate business health.
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