The Brass Tacks on Small Business Taxes - Part 2, Ep #36
99.9% of businesses across the U.S. are small businesses, with eight out of ten being owner-only businesses. In this episode of the One for the Money podcast, I share strategies that small business owners can consider to save on taxes. This episode is the second of two on the subject. I recommend you listen to episode 35 to hear other strategies. Listen to the end when I share an approach to tax deductions for vehicles used in your business.
In this episode...
Kids earning income [01:41]
The power of a Roth IRA [04:18]
The Augusta Rule [07:36]
Tax deductions on vehicles in your business [11:08]
Small businesses and paying family
Business owners can save on taxes by paying their children for work they do at the company in a family-run business. Sometimes the entire family is needed to keep a business viable. The whole family commonly runs family restaurants and family farms. In these instances, the children can be paid for the work they do for the business. Because the children will be earning an income, they must pay taxes at a certain level. As a reminder, that level is anything above the standard deduction of $13,850.
If your children each earned $13,850, they would pay $0 in federal income taxes. That money could be used to help them pay for their own expenses, such as cars and clothes, all while your business gets a deduction for their salary. That’s a much better thought than having the business owners receive their taxed income and pay for the same expenses.
Child Roth IRAs
One of the best things you could have your kids do with this earned income is to fund a Roth IRA. With retirement accounts, you always have to pay income taxes. Of course, you’d want to pay taxes when it’s to your advantage and when rates are lowest. The tax rate for children can be as low as $0. If your kid earns $6,500, they could contribute that to an IRA and pay nothing in federal income taxes. Because it’s a Roth IRA, taxes on that money won’t have to be paid again.
The best thing you can do as an investor is to increase your time horizon. Having your kids set up a Roth IRA gives them decades more time for their investments to benefit from compound interest. While hiring a child may not be top of mind for many business owners, there can be a surprisingly broad array of tax and other benefits. The caveat is that the child must be doing age-appropriate work for a reasonable wage.
Vehicle tax savings for small businesses
If you use a vehicle for your small business, how and when you deduct the business use for the vehicle can have significant tax savings. The cost of operating vehicles used for business activities is typically deductible, along with the cost of the vehicles as equipment. You can calculate expenses using the IRS’ standard mileage rate for most vehicles. For 2022, that average is between 58.5 cents per mile and 62.5 cents per mile. The other option is to add up actual expenses, including gas and oil changes, tires, repairs, etc. The vehicle doesn’t have to be owned by the company itself but can also be owned by the employee.
If your business leases a vehicle, you can calculate the deduction using either the standard mileage or the actual expenses method. For new and pre-owned vehicles put to use in the tax year of 2022, the maximum first-year depreciation write-off is $11,200, plus an additional $8,000 bonus depreciation. If you use the vehicle for personal and business use, you can split the percentage between the two. Be sure to keep excellent records and speak with an accounting professional.
Securities and Advisory services offered through LPL Financial. A registered investment advisor. Member FINRA & SIPC.
Resources & People Mentioned
The Augusta Rule - Tax Free Rental Income | HLB Gross Collins
Hiring Children In The Family Business For Tax (And Other) Benefits
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