Tag Archives: business owner


3 Key Tax Strategies for Small Business Owners

Small business owners pay their taxes all year long, so they should be focusing on tax planning all year long. That doesn’t mean small business owners should make financial decisions based solely on tax considerations. But it does mean they should never make important financial decisions without at least considering the tax consequences.

Health insurance deductions for self-employed individuals

 Many freelancers needlessly overpay their taxes because they’re unaware that the law entitles them to deduct 100 percent of their spending for medical insurance premiums (including qualifying long-term coverage) for themselves and their spouses and dependents.

They take the health insurance deduction “above the line” on Line 29 on the front of the 1040 form, thereby reducing their adjusted gross income (AGI), Line 37.

This is a big break for freelancers and other self-employed individuals, regardless of whether their unreimbursed medical expenses aren’t high enough to claim as itemized deductions on Schedule A of Form 1040, notes the New York Times of Feb. 19, 2017.

There’s an exception for people 65 and older. Their threshold is 7.5 percent. This break went off the books at the close of 2016, though there’s bipartisan support in Congress to extend it beyond 2016.Long-standing rules forbid itemizers from writing off all of their medical outlays. Itemizers can claim their expenditures just to the extent they exceed 10 percent of AGI. No deduction for anything below the 10-percent-of-AGI threshold.

First-year expensing

Tax-savvy freelancers know they have two ways to write off their outlays for purchases of equipment – for instance, computers and file cabinets.

Freelancers who go the “standard” route recover the cost through depreciation deductions over a period of years. Their other option is the frequently overlooked tactic of “expensing,” meaning they deduct a specified amount of equipment in the year of purchase.

To illustrate, a self-employed person’s equipment purchases include $10,000 for cameras, computers, copiers, tape recorders, and the like. Instead of depreciating them over five years, they can be immediately expensed under Code Section 179. A $10,000 write-off lowers taxes by $3,000 for an individual in a top federal and state bracket of 30 percent.

Profit from paying your kids

Do your children help out with some of the chores connected with your business? Could they? Then a savvy way to take care of their allowances or spending money – at the expense of the IRS – is to pay them wages for work they do on behalf of the business. This holds true whether it’s a full-time, long-established operation or just a new, part-time sideline.

Putting your children on the payroll is a perfectly legal way to keep income in the family, while shifting some out of your higher bracket and into their lower bracket. IRS auditors require this kind of expense to pass a two-step test:

  1. Your children have to actually render services.
  2. You pay them wages that the IRS deems “reasonable” – agency lingo for not more than the going rate for unrelated employees performing comparable chores like clerical work or deliveries.

Section 3121(b)(3)(A) authorizes another break. It permits you to sidestep Social Security taxes on the wages you pay your children under the age of 18. To qualify for the exemption, you must operate as a sole proprietorship, meaning the lone owner of a full-time or part-time business that’s not formed as a corporation or partnership, or do business as a husband-wife partnership. Put another way: No exemption for a family business that’s incorporated or a partnership with a partner other than a spouse.

Another break for business owners is that write-offs for equipment purchases and wages save more than just income taxes. They also reduce self-employment taxes owed.

Attorney and author Julian Block is frequently quoted in the New York Times, Wall Street Journal, and the Washington Post. He has been cited as “a leading tax professional” (New York Times), an “accomplished writer on taxes” (Wall Street Journal), and “an authority on tax planning” (Financial Planning magazine). More information about his books can be found at julianblocktaxexpert.com.

From 3 Key Tax Strategies for Small Business Owners, Copyright ©2017, Sift Media.


Financial Planning for Small Business Owners

At HFM we know many business owners that are great at what they do, (build houses, sell appliances, provide IT services) but need help managing their finances. We agree with this article that these are the areas where expertise is a necessity. 

Who hasn’t dreamed about starting a business?

Becoming a successful entrepreneur has replaced home ownership as the new definition of the American Dream, thanks to the recent collapse of the real estate market and the made-for-Hollywood stories of folks like Steve Jobs or Mark Zuckerberg, of Apple and Facebook, respectively.

But while Jobs and Zuckerberg have become household names, fame ought to be the least of the attractions in owning a business. More compelling to the tens of thousands of individuals starting a small business every year is the allure of being master of one’s own professional success.

Being the boss can be exhilarating.

But there are also significant risks to going out on your own. Unfortunately, the failure rate of small business is high, with only 20 percent of new businesses surviving for five years. Another depressing statistic: fewer than 40 percent of self-employed persons working alone make more than $25,000 a year.

The old saying, “No one plans to fail, but many fail to plan,” has special applicability to the new business owner. Starting up can be deceptively simple: Facebook was launched with just an innovative idea, a laptop, and a dorm room. But from the very outset, business owners need to be aware that even the most basic business model entails considerable financial planning complexity.

Comprehensive financial planning for an individual or couple generally involves tax planning, risk management, investment planning, retirement planning and gift and estate planning.

For each of these areas, let’s consider how business ownership takes this planning to another level.

  • Tax Planning:  The legal structure chosen for the business – sole proprietorship, partnership, limited liability company (LLC), or a corporation – will determine how the business profits are taxed. As a sole proprietor or single owner of an LLC, your business income is treated the same as your personal income, making tax compliance considerably simpler. Add partners or additional LLC members, and while again the business income flows through to the individual return, it is possible to split the taxable income (and losses) of the business in ways that can benefit multiple owners. S-corporation status can allow business owners to take some distributions of income without paying self-employment taxes, whereas C-corporation status entails separate taxation at the business level, at different rates from what the business owner pays on his personal return. To the extent that individuals and C-corporations have different marginal rates at different brackets of income, it is possible to coordinate the taxation of business and personal income in a way that provides the greatest benefit to both the business and its owner.
  • Risk Management: Most individuals need to plan for the financial risk of early death, disability, illness and infirmity, and liability or loss related to property ownership.  Once an individual owns a business, however, the risks multiply to include: interruption of the business due to a disaster; death or disability of a person key to the success of the business; loss of business property; and lawsuits resulting from negligence or defective products.  This last risk can be addressed in part by the legal structure of the business, but the others require specialized insurance coverage over and beyond what the owner holds for himself and his family.  If the business has employees, worker’s compensation coverage becomes necessary as well.
  • Retirement Planning:  It’s not uncommon for business owners to assume they will never retire.  After all, they’re presumably doing what they love, so why not continue indefinitely? Alternatively, they may see the business as the only retirement plan necessary – as a source of capital that will fund their retirement needs. Thinking along these lines is generally a mistake: If anything, a business owner may need more retirement planning rather than less, to prepare for the time when he no longer can or wishes to work, and/or the business cannot fully provide for his financial needs. The good news is that business ownership affords all sorts of tax-advantaged ways to save for retirement, and the ability to put aside amounts considerably larger than what is permissible to non-business owners.
  • Investment Planning: Most small businesses are self-financed by their owners, which results in the business becoming the owner’s major or only investment. Even when the owner has extra capital to make other investments, he may still prefer to put his money back into his business, where he feels he has the most control over his returns. Prudent planning nevertheless must be focused on diversification. Asset classes and investments must be carefully selected for the owner’s personal portfolio to offset the concentrated risk he is taking with the business.
  • Estate Planning: If a small business grows and becomes a valuable asset, simple wills or family trusts set up for personal affairs may no longer suffice for the transfer of the business. More sophisticated financial planning techniques will be necessary to ensure business continuity after death, reduce any estate taxes assessed for the business, and to provide liquidity to heirs to pay those taxes. A reorganization of the business might be advisable to create different types of ownership for family members, and to make full use of IRS-sanctioned discounts in valuing the business for purposes of gift and estate taxes.  Insurance trusts and charitable trusts can also play an important role in the efficient transfer of a small business.

One point should be clear when it comes to financial planning for the small business owner: the do-it-yourself drive that helped you start your business will not serve you well when it comes to managing the many financial issues created by that business.  This is where professional expertise often becomes necessary.

Exercise your privileges as chief executive officer, and delegate these issues to qualified tax and financial planning professionals. Their advice can make all the difference in improving your chances of business success.

From Financial Planning for Small Business Owners Copyright ©2017, Certified Financial Planner Board of Standards, Inc. All rights reserved. Used with permission.