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    How To Take The Stress Out Of Taxes For Business Owners

    Small Business Tax Stress Robert Huffstutter/Flickr

    Every penny counts when you are running a small business. Likewise, many successful entrepreneurs suffer from a lack of time. There are just never enough hours in the day to get everything done.  Still, please make sure the time to work with your LA financial planner to make sure you are doing the things necessary to pay the least amount of taxes each year.  Tax planning is even more complicated and valuable for a business owner in California (a high-tax state). Tax planning stress might prompt you to avoid implementing all of the valuable tax planning strategies available to smart business owners.

    Minimizing taxes may be the difference between a highly profitable business and one that is just scraping by. You all are probably thinking, “I don’t have extra time to deal with taxes.”   I heard your concerns, and that’s why I’ve come up with seven tips that will help lower your tax bill and won’t take a ton of time.  We are here to help you both reach your financial goals faster and easier as well as help you pay the least amount of taxes as legally possible.

    By David Rae Certified Financial Planner™, Accredited Investment Fiduciary™

    Here are seven ways you can tame the stress of small business taxes and hopefully put a little (or a lot) more money back in your pockets. It’s not what you make but what you keep.  Tax planning is part of running a successful California business. The higher your income the more valuable tax planning can be.  Many tax planning strategies that help minimize your federal taxes, can also help reduce your California state taxes levied on your business.

    During the Coronavirus and COVID Lockdowns- reducing your tax filing stress is even more valuable.

    Reduce Small Business Tax Stress and Save Some Money

    1. Tax Software is Your Friend

    Let’s be real. Tax planning software is a must for small business owners.  Using tax software like Turbo Tax or something similar will make preparing and filing your taxes online much easier.

    Ditch the paper. The IRS has reported that less than 1% of online tax returns had errors. That number skyrockets to 21% when you file using paper returns.

    If this sounds like too much work, hire a tax professional, and maybe a bookkeeper. Even with the best CPA, if you don’t have the right info about your tax-deductible expenses, you will pay more in taxes. All those small, missed tax deductions can really add up.

    1. Track Your Spending to Maximize Valuable Tax Deductions

    Keeping track of your spending is easier than ever these days, but it can still seem daunting to some. Most credit cards will send you a year in review, and all of your bank transactions are available online. While online banking has made things a lot easier, there is still plenty of room to miss valuable tax deductions.  As I mentioned above, use additional software like Quickbooks or Quicken so that you will have one more opportunity to catch all tax-deductible expenses for your business.  More tax deductions mean more tax savings.

    Tax deductions are valuable no matter where you are, but in tax-heavy cities like Los Angeles or Palm Springs, tax planning is even more important for the self-employed and small business owners.

    I just saw a friend of mine, who happens to be a West Hollywood business owner, drag shoeboxes full of receipts to his CPA. How much fun do you think about adding up every one of those receipts will be? What are the odds that he ends up missing a few receipts? Talk about a stressful pain in the butt.  P.S. any CPA worth a darn will charge you extra for going through all those receipts. At $150+ per hour, you could be looking at a hefty added expense on top of missed deductions.

    Using software like  Quickbooks and Quicken to track your spending throughout the year can make the process of filing your taxes much easier. A little time here and there will surely be less painful than organizing hundreds, if not thousands, of receipts all at once. Be sure to attach your bank accounts and credit cards to the software so those accounts are tallied into your total spending, which will allow you to keep track of it all. Doing so will allow you to click just a few buttons to produce a report of all of your spending when tax time rolls around again. Perhaps the best part of all is that zero math will be needed.

    1. Pay Your Retirement Accounts First

    No one has more retirement planning options than those who are self-employed and small business owners. For those who fit into one or both of these categories, you still have access to a Traditional IRA like everyone else, capping at $6500 per year (for 2023). This type of IRA can also be combined with retirement plans like a 401(K) or SEP IRA, thereby allowing you to contribute up to an additional  $66,000  in 2023 (Increasing to $69,000 in 2024). Contribution limits are even higher for those of you over 50.  Stack a 401(K) with a Cash Balance Pension Plan, and you may be able to put away closer to $300,000 per year.

    When you are income-wise, you can lower your federal tax bill and your California tax bill. Contributions to the plans mentioned above will get you a tax deduction. This can be huge for businesses that are trying to keep the new QBI pass-through entity tax break.  For those of you in California, you will need all the help you can get; the Trump Tax Plan is killer for many with six-figure+ incomes here. 

    If your taxable income exceeds a threshold of $164,900 for single filers and $329,800 for joint filers, the deduction is reduced pro-rata under the “phase-in rule.” The phase-in is complete when income reaches $213,300 for single filers and $426,600 for joint filers. If you find yourself above these upper thresholds, you, unfortunately, won’t get the pass-through deduction—period.  However, making contributions to retirement accounts will reduce your taxable income and maybe get you back below these income thresholds, thereby qualifying your business for the new 20% pass-through tax break. Double Win!

    Talk to your Los Angeles fiduciary financial planner and CPA to help narrow down which retirement plan will allow your business to contribute the most for the largest tax deduction. These moves pay off now with tax breaks and pay off later by helping you create a secure retirement.

    Top Financial Advisor Los Angeles David Rae

    1. Deduct Your Home Office

    Too many people who work from home are afraid of taking the home office deduction. I cover this topic in-depth here  Why are You Afraid of the Home Office Deduction?  If you work from home at least look at if you qualify for this tax deduction. You may be surprised by how much money you can save.

    1. Stop Ignoring Your Auto Expenses

    You may not be aware of this, but you can deduct your auto expenses when used for business. I just had a client leave his employer so he could start his own business. For the first two months after he went out on his own, he tracked his mileage and guessed how much of it was for his business. The number was a little more than 90%. If this pace continues for the whole year, he will be able to deduct thousands of dollars because he uses his car for business.  I am a Los Angeles financial planner, where auto-related costs are quite high.

    What percentage of your car’s mileage is attributable to your business? Whatever the number may be, you can apply that percentage to your auto expenses for the year. For those of you who hate crunching numbers, I’m sorry. I can’t completely remove math from your life.

    The IRS provides two ways to calculate this deduction. First, track your actual expenses. Then deduct the percentage of usage that is tied to your business.  Second, track your actual mileage and take a tax deduction for those miles. Keep in mind that the rate is 56 per mile for 2021.

    Auto Expense Tax Deduction Example:

    Let’s say you drive a Range Rover (I’m in LA). You pay $1500 per month to lease it and drive 10,000 miles a year of which 80% of that 10,000 miles is driving for work. Using actual expenses, you would end up spending $18,000 in lease payments for the year, plus gas and other maintenance. If you only listed the yearly total of your lease, you would end up with about a $14,400 tax deduction. Compare that dollar amount to if you decided to use the standard mileage rate deduction. That total would only be $4,480!

    For the Prius driver with a $200 per month payment, the math will be much different. Using the same 10,000 miles a year with 80% of that total used for business, which deduction do you think will be better? Using actual expenses, you would be able to deduct $1,920 plus 80% of gas and maintenance. On the other hand, if you chose the mileage deduction, you would end up with a much larger deduction, somewhere in the neighborhood of $4,480.

    Yes, tracking all of this stuff will take a little time. However, how much time would you need to work to earn comparable tax savings? I’m guessing more time that it will take to track your mileage. There are even apps now to help you do it.

    1. Employ Family Members In Your Small Business

    My husband is my director of operations at my financial planning firm, DRM Wealth Management LLC. This allows us to nearly double the money we can contribute to our retirement accounts (tip 3).   This happens to be his full-time job, but it doesn’t have to be in your case.  Does your spouse help with paperwork or bookkeeping? Consider paying him or her for the time spent. It could help your spouse understand more about the business and be more supportive of all your hard work. It may also have some additional tax benefits in certain cases.

    Many business owner parents have also been known to hire their children.  I’m not advocating child labor, but it can be a great opportunity to teach them the value of a dollar.  Typically, children will be in a lower tax bracket, so paying them for work may help reduce the overall tax burden for the family.

    For extra credit, have the kids open a ROTH IRA with their earnings. Imagine what compounding interest could do for an investment account opened as a teenager.  If your child put away $6000 for just three years from 15 to 17 into a ROTH IRA.  Never contributed again and earned 10% per year until 70; how much would you have?  Contributing just $18000 would turn into a whopping 3.1 million dollars!  You could literally turn your kids into future millionaires!!

    7. Track Your Carryover Tax Deductions

    For those of you whose eyes just glazed over, I’m talking about tax deductions for things like capital losses, net operating losses, home office deductions, or even large charitable donations. These are a few deductions or credits that, when not fully used in one year, may be carried forward to a future year.

    Who remembers tax info from last week, let alone previous years? These things have a way of slipping through the cracks, especially when switching tax preparers. Make a note or track these deductions so you don’t forget them the following year.

    8. Don’t Ignore The Pass-Through Entity Tax Deduction

    If you are in a high-tax state or just in a high state tax bracket, the Pass-Through Entity Tax deduction can be huge. The Trump Tax Plan limited the state and local tax deduction to just $10,000 per couple per year.  If you live in an area like West Hollywood or Palm Springs, your property taxes alone will eat up most of this number.   Talk with your tax planning CFP about this valuable tax strategy, and if they aren’t able or willing to help, it’s probably time to find a better fee-only financial planner.

    Read More About The Pass Through Entity Tax Here

    Small business ownership is hard enough without having to stress about all this tax filing stuff. Do yourself a favor and break up the accounting throughout the year and let the software do most of the heavy lifting. Before you know it, tax season will be a breeze, and you will have forgotten why it always used to stress you out. Hopefully, a lower tax bill will come your way as well.

    How stressed are you every year when tax filing time comes around?  Do yourself a favor and pick one of these 7 Small Business Tax Stress Filing Tips to implement now.  Your wallet and stress level will thank you. Small Business Taxes don’t have to be stressful.

    Small Business Tax Stress David Rae Financial Planner on ABC 7 News Los Angeles
    Small Business Tax Stress David Rae Financial Planner on ABC 7 News Los Angeles
    Live for Today, Plan for a Richer Tomorrow.

    DAVID RAE, CFP®, AIF® is a West Hollywood financial planner with DRM Wealth Management. A regular contributor to Forbes.com Advocate Magazine and Huffington Post, not to mention numerous TV appearances as a Los Angeles tax expert.  He helps friends of the LGBT Community get on track for their financial goals.  For more information, visit his website at www.davidraefp.com

    Financial Planner LA David Rae loves helping high-income businesses minimize their tax bills with proactive tax planning.

    19 Amazing Tax Deductions For California Small Businesses

    Connect With David Rae, Financial Planner LA

    David Rae, CFP® AIF®

    President / Founder DRM Wealth Management LLC

    1(323) 905-4380

    david.rae@financialplannerla.com

    "How To Take The Stress Out Of Taxes For Business Owners"

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