No matter what kind of practice you have, where you’re located or what your scope of service might be, you’ll be your clients’ hero any time you can legitimately lower their tax liability. Here are a few well-known tax tips and a few you may not know existed.
Well Known Tip #1: Simplified Home Office Deduction
If you have clients who use their home for business purposes, the home office deduction is a great benefit. The Simplified Home Office Deduction makes it simple to implement as well:
- $5/sqft, up to a maximum of 300 sqft (make sure you only count square footage that you use for business).
- Allowable itemized deductions, claimed in full on the Schedule A.
- No depreciation recapture on the home, if you use the simplified method.
Well Known Tip #2: Employing Your Children
If you have kids who work for your accounting business or if you have clients who use their kids in the business, make sure they are paid a wage up to $6,300 for a nice tax reduction.
- Children who earn less than $6,300 in wages do not have to file or pay taxes. The standard deduction makes their taxable income $0.
- Make sure you run payroll; making them an independent contractor won’t work.
- Sole Proprietors and Partnerships owned 100% by parents do not have to pay the payroll tax, either.
Well Known Tip #3: Solo 401(k)
401(k) plans are a great way to defer income into retirement and enjoy tax-free capital appreciation, until you are ready to pull the funds. Your small business can start a Solo 401(k), too, for added benefits:
- Solo 401(k) owners can reach large contribution amounts easily since they don’t have non-family employees to factor in.
- Solo 401(k) accounts are often 60-70% less in fees than normal multi-employee plans.
- Pay your kids even more if they are going to be part of the 401(k), and you will get maximum benefit (keep in mind you may need to file a Form 5500).
Unknown Tip #1: 14-Day Rental If you own your residence, then you can rent it out to non-family members for up to 14 days, and the income you earn is not taxed. If you want to make this a business deduction, simply rent your home to a friend’s business and vice-versa:
- You rent your home to a friend’s business (non-family member) for up to 14 days. They take a deduction on their return for the rent, but you pay nothing on the rental income.
- Do the same with your business by renting your friend’s home. You take the deduction and they do not claim the income.
- Make sure you are using the homes for business meetings of some kind, and get quotes from hotels or convention centers so you can justify the amount of rent you are charging each day.
- See IRS Tax Topic 415 for more information.
Unknown Tip #2: Defined Benefit Plans
Need to get more tax-deferred money into a retirement plan than what a 401(k) allows? If so, then it’s time to explore the Defined Benefit Plan:
- Publication 560 will help you navigate the fine details.
- Defined Benefit Plans use actuarial information to predict what needs to be contributed each year, so that the pension payments are paid each year of your retired life.
- If your pension needs to pay you $200K a year, the contributions from your business now can be very high.
- All pension contributions from the business are deductible, so this option is great for your high-net-worth clients who earn $500K or more a year.
Editor’s Note: Christopher Ragain recently presented these tips and more in QB Power Hour, a webcast presented by Hector Garcia, CPA, Michelle Long, CPA, every other Thursday. In this episode, the hosts talk to Christopher and other leaders in the tax planning community about how accountants can provide more tax planning and some of the best practices for delivering the work. Click here for more information on future Power Hour episodes and to sign up for the webcasts.