6 Self Employed Tax Deductions Small Business Owners Should Know
There’s also not much you can do to stop interest rates from climbing or stocks from falling, either. Still, you may have more control than you realize when it comes to another financial pain point that can significantly impact your budget — your taxes. Taxes are your largest expense in life.
You can reduce your tax obligations as a small business owner through several potential money-saving opportunities. Some of these strategies may seem obvious while others may not.
2 Solo 401(k) Plan
Solo 401(k) plans offer self-employed and owner-only businesses high saving limits and tax advantages. Solo 401(k)s allow you to contribute to the plan as both the employer and employee, providing you the ability to maximize your personal retirement contributions and business deductions while lowering your personal taxes. The contribution limits are nearly 10x a traditional IRA.
Self-employed individuals and business owners with no common-law employees and their spouses who are employed by the business can still set up a Solo 401k plan and even contribute pre-tax income up to $61,000 as both your own employer & the employee. Employers can contribute up to 25% of compensation* not to exceed $58,000 for the 2021 tax year and $61,000 for the 2022 tax year.
These also allow for maximum flexibility and can even be used to invest in private equity & cryptocurrencies.
4 1031 Exchange
This allows you to reinvest real estate sale proceeds that would otherwise be subject to capital gains taxes.
If you hold a property for business or investment and want to do a “like-kind exchange”, this lets you defer capital gains tax. A 1031 exchange is a tax break. You can sell a property held for business or investment purposes and swap it for a new one that you purchase for the same purpose, allowing you to defer capital gains tax on the sale.
Proceeds from the sale must be held in escrow by a third party, then used to buy the new property; you cannot receive them, even temporarily.
5 IRS Section 179 Tax Deduction
Depending on vehicle weight, this deduction allows business owners to potentially write off the entire cost of a vehicle used for work. Costing more than $160,000, Mercedes G-Wagons is hardly what most people would think of as a bargain — but for higher income earners, these luxury SUVs are rolling tax loopholes.
The so-called “Hummer Deduction,” Section 179, allows a car that weighs at least 6,000 pounds to count as a tax benefit in some circumstances. Snap it up via your company, use it for business at least 50% half the time, and that Mercedes G-class — or Cadillac Escalade (starting at $76K) or Infinity QX80 (from $70,000) — could earn a $25,000 deduction the first year of ownership. It must also have a gross vehicle weight of between 6,000 pounds and 14,000 pounds. If you’re purchasing a vehicle for your business and you plan to claim Section 179 tax breaks, make sure that the vehicle title has the name of the business instead of your personal name.
That real estate agent with the G-wagon? Likely took advantage of a large write-off.
In small businesses, every penny counts. If you can lower your tax liability, it may result in extra profit you get to keep—or reinvest in your business. Fortunately, the IRS has provided several opportunities to lower your tax bill as a small business owner.
Some of these require tax planning in advance, such as choosing the right vehicle for your business, suitable retirement account contributions, and more. To make the most of the deductions available to you, consider working with a tax professional who can identify your unique needs. If you are a small business and have any questions feel free to reach out for a free consultation.