President Joe Biden recently announced the American Families Plan. Biden suggests paying for the AFP by increasing the capital income tax rate from 23.8 percent to 43.4 percent (including a surcharge) for households making more than $ 1 million a year.
Many small business owners don’t make $ 1 million in their prime selling their business (for the purposes of this proposal, capital gains tax is considered income).
For example, let’s say you wanted to sell your business to retire. If so, you may have to work another five to ten years to save up for your planned retirement.
If you sell your business for $ 10 million under the new tax law, nearly $ 2 million of your after-tax proceeds will be evaporated. It is imperative that you reduce your tax burden to counter this blow.
You only pay taxes on the profit, so you want to claim every expense. IRS Form 8829 allows you to deduct home office expenses such as mortgage interest, property taxes, utilities, and depreciation. Make sure you take advantage of technology, supplies, cell phones, and business travel.
Your expenses shouldn’t consistently exceed your income.
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Some owners have told me that they take any “profit” and invest it back in the company. However, that just means that your company is not making any money and it is essentially worthless.
Some owners have told me that they take any “profit” and invest it back in the company. However, that just means that your company is not making any money and it is essentially worthless.
You can help yourself and your employees by finding a non-cash means to compensate them. If you pay your employee with wages, they will have to pay income tax. Both the owner and the worker must pay the Federal Insurance Contributions Act (FICA) and Medicare tax – 7.65 percent each.
Add employee benefits instead of making increases. For example, add an equivalent amount of additional health insurance or college reimbursement.
You can take your input tax money and put it in tax deferred investment accounts. You lower your taxes when building your retirement provision portfolio.
Contribution to a qualifying plan reduces taxable self-employment income.
For example, suppose your taxable self-employment income without a qualifying plan contribution is $ 300,000. Bringing $ 50,000 into a qualifying plan will reduce your taxable income to $ 250,000. This lower income translates into fewer tax payments elsewhere.
This will have no impact on your Social Security taxes as you will have to pay up to your first $ 142,800 of income in 2021. However, you’d pay $ 1,450 less in Medicare taxes (2.9 percent) and your additional Medicare self-employment tax. Income would drop to zero as it is only assessed on income greater than $ 250,000.
Your federal income tax amount would be reduced by nearly $ 20,000, representing a decrease in your tax costs of about 16 percent.
A SEP IRA allows business owners to shield up to USD 58,000 per year (2021 limits). “SEP” stands for simplified employee pension. It offers the benefits of a traditional IRA in terms of property and taxes. The downside is that you have to do a proportionate contribution to the staff, and that can be expensive.
A SIMPLE IRA may be a cheaper option than a SEP IRA. SIMPLE stands for Savings Incentive Match Plan for employees. Like the SEP, the SIMPLE IRA avoids complex federal reporting requirements typical of a 401 (k).
The SIMPLE dictates that employers offer a match (for example, an employee’s contributions up to 3 percent of wages). Contributions are capped at $ 13,500 (2021 limit) and staff are responsible for their contributions that do not match the game.
A Health Savings Account (HSA) allows you to deduct up to $ 7,200 in income per year (2021 limit) from taxes. An HSA is unique because you benefit from both tax-deductible contributions and tax-free federal distributions. The HSA allows you to use untaxed money for costs such as deductibles, co-payments, and other medical expenses.
A defined benefit plan can be either a cash plan or a retirement plan. Defined benefit plan participants can contribute up to $ 230,000 per year in 2021. Instead of paying taxes on $ 2,300,000 for the next ten years ($ 230,000 times 10 years unless increases are made), put that in a retirement account.
During this period, you will legally avoid paying taxes on what would otherwise have been considered taxable income.
Let’s say you want to top up your tax savings. In this case, a business owner and spouse can “subpoena” a contribution and protect nearly $ 900,000 of your income. Defined benefit plans like 401 (k) can allow credit. You can lower your taxes and then still have access to spending.
The retirement version of defined benefit plans has become less popular as large companies have reduced their legacy costs. The cash balance version is similar to a retirement plan, but instead of providing an annuity payment, employees have their own fixed lump sum.
IRS Publication 3998 (Rev. 11-2020) irs.gov/pub/irs-pdf/p3998.pdf provides additional retirement solutions and other details to help you protect your business from taxes.
Regardless of your policy, it is your responsibility to maximize your success by minimizing your taxes. Higher taxes make your business less valuable, but these “loopholes” can help you move forward in retirement.