You read that correctly but, it’s more likely your retirement adviser is really a salesmen for a company that is trying to make money by investing your money. Good return or bad return, they get paid. But, for the small business owner, there are so many products out there to choose from, rare is the retirement account salesmen not in bed with one of the investment companies. Nonetheless, this post is for business owners who want to avoid paying taxes by saving for their future or want to save in alternative investments (gold, real estate, art, etc.). Avoidance by the IRS is fine. Evasion is not-so-fine. While, there is a little bit of a grey line as to what is avoidance and evasion, these plans are 100% legit and legal. The government wants you to save money and therefore has provided these generous tax benefits. So let’s start avoiding taxes:
- SEP-IRA. This is an IRA for the owner of a business. It will allow you to save up to $50,000 per year. Not to bad. At the highest rate of tax, that saves you $18,500.00 in tax. Most people do not pay 37% (as of 2018) so it most likely saves you about $12,500. This is the most basic model and should be used for anyone who is beginning a business and wants a safe, easy way to sock away money. But, contributions to the plan are limited to 25% of compensation. Therefore, you can only contribute 25% of your income. Thus, to max it out, you’d have to pay yourself $200,000 in payroll and you don’t want to pay yourself that much because you’re going to be paying large amounts of payroll taxes on your salary. So, perhaps there’s a better way.
- 401(k) + Profit Sharing Plan. This allows $18,500 of your compensation to go into the 401(k) plan and then 25% of your compensation, up to $250k, so another $62,500. This would give you the ability to put away $81,000. Better than the last plan and sometimes in an S Corporation you have to pay yourself a larger salary so that you are paying yourself a “reasonable” salary, and in that case this makes the most sense. But, see the next paragraph.
I love this photo. I’m in Tampa and I hope to have a gigantic company and the ability to take my board members skiing in the Alps, all the while making it a deduction to the company. This post explains how I would do just that.
You should deduct every cent of travelling, hotel, and food associated with any board meeting or meeting of the managers. Lots of people don’t take advantage of this. It takes a little planning but can be worth it in the end.
Lets begin briefly with the basics. You can deduct ordinary and necessary expenses from your businesses income. What is ordinary? It’s everything that’s not extra-ordinary. For instance, buying a truck for 99% of tax payers is extra-ordinary, it’s not something you do often. But, Ford may purchase from its subsidiaries thousands of trucks, and therefore it would be ordinary. So, it’s fact dependent. If it’s extra-ordinary and necessary, then it will be amortized and depreciated over time. Whether or not something is necessary, is also up for grabs, but let’s not get silly. We know our Ferrari is usually not necessary but, if you’re a high-end broker and all your clients have Ferraris, you just might need one to fit in. I’m just saying, you can’t exactly stroll up in a Pinto to Tampa Palms and expect to be taken seriously. Nonetheless, board meetings are always ordinary and necessary but, that doesn’t stop the IRS from balking at the deduction. So here are some rules for deducting your week-long, Paris board meeting.
Wait, what? My CPA isn’t telling me about all the deductions I could be taking or strategies I could use to reduce my tax bill? Then why am I paying him/her?
Frankly, you’re paying to produce a tax return so that you can file it with Uncle Sam and not get in trouble for not filing. Because, we all know what happens when you don’t file, right Wesley Snipes (I love that case, so funny, I mean really, did he think he was going to win)?