When I was old enough to understand that a man was supposed to work hard the majority of his life, I knew I would become a painter. I would carry on the family business and follow in the footsteps of my father. At 46, almost old enough for my son to take my place, I wish I’d known then what I do now about owning a business and tax advantages.
As a small business owner, it is imperative to understand all tax advantages available to you. Then it becomes essential to take advantage of those tax breaks. The younger you are when you adopt these practices, the younger you will be able to retire.
When you decide to run a business, don’t only educate yourself on how to perform the service you are to provide. By educating yourself about things like the tax advantages offered to your small business, you will surely retire much younger and with significantly more money than you ever dreamed possible.
Small Business Tax Deductions to Take Advantage of While You’re Young
Knowing the financial end of your small business like you know about the product or service you provide is essential if your goal is to retire at a reasonable age. You should be experts in both fields, ideally. But if numbers are not your thing, then you need a reputable CPA on the case. They can let you know about all the tax deductions you should take from day one.
By understanding what you can and cannot use as a tax write-off at the end of the year, you ensure more cash in your pocket after the tax man cometh. For example, as the owner of a painting company, there were many costs that I initially took for granted as an expense I simply had to incur. However, after I hired a CPA, she showed me the way to write off heaven.
Home Office Deduction
Charity starts at home, and so do tax deductions if you can prove that a portion of your home’s sole use is for conducting your business. In my case, we had a room that served as the business hub for my painting operation. I was also able to deduct part of my utility bills, as well. With my wife as the business manager operating the phones, there was no denying these deductions.
Others under the umbrella of Home Office Deduction include “a portion of your rent or mortgage payment, it also includes deducting a portion of your…insurance and repairs,” according to Kristie Loretta. This deduction will go a long way toward easing your life as you age. The money missed over the years could be astronomical by not deducting your home office.
Vehicle and Travel Expense Deductions
Yes, you own your truck, more than likely, not the paint company, but that is ok. If you use your personal vehicle as a work truck, you can start deducting and keep saving. The IRS gives business owners a couple of different options here.
Lorette tells us that “you have the choice of deducting actual costs for gas, repairs, tolls and parking or you can take the standard mileage deduction rate.” Again, knowing about this write-off will end up putting a sizeable amount of money away much faster.
Also, the frequent flyer miles acquired through a business trip need not be redeemed for business purposes. While you may not receive cash back, you could get a complimentary flight to a fabulous local. By way of subtracting from your taxes, if you’re on business, you can add up deductions from meals, lodging, and entertainment, as well.
Healthcare and Retirement Write-Offs
As a small business owner, you may be of the school of thought that healthcare and retirement funds are things you left behind when you took to painting houses over punching the clock. But the good ole IRS is doing its best to look out for you.
Some health care plans are HSA approved, Health Spending Account. Not only is it the law to have insurance, having a program that allows for an HSA puts the money into the account pre-tax. And if you become ill, you can also deduct the hospital expenses. That health care deduction will come in handy for saving money, and it will help you live long enough to enjoy it.
For many who might think about opening a small business, the lack of a retirement fund could be a deterrent. But fear not; investing in your future retirement is tax-free if you’re talking 401K. Again, you may not be deducting from your year-end bottom line, but the tax-free bit still helps you save.
Hire a Family Member
The IRS offers various ways to save some cash if you decide to bring your family on board as employees. By hiring my son, who will eventually take over the business, I did not have to pay taxes on his income. I may have started later at saving because of taxes, but it adds up, and the lessons my son is taking away will put him in a position to retire years before the age I did.
John P. Schmoll Jr. tells us small business owners can benefit by “reducing their taxes by hiring a spouse, who would not be subject to the FUTA tax. Depending on the benefits they may have through another job, you may also be able to put aside retirement savings for them.” That worked out so well, as no one could have given our customers better care than my better half.
Other Odd Deductions
A few other deductions don’t fall into any of the above categories, and they are a bit out of the left field, so I’m glad my CPA filled me in on them. They include:
- Money from unpaid accounts
- Gifts for clients up to a particular amount
- Continuing education as it relates to your field
- Funds for taking clients out on the town
- Building a website
- A safe to hold all that money you are saving
Putting these deductions to use can help out to ensure you’re able to retire and still be able to enjoy the time you have left.
Small Business Taxes FAQs
How Can My Business Get Out of Paying Taxes?
While this may seem to be a pipe dream, apparently, businesses can really get out of paying taxes. According to Matthew Johnston, “This includes finding ways to shift U.S. profits to foreign subsidiaries in countries with lower tax rates, a practice known as an offshore tax-shelter.”
If you’re knowledgeable enough to pull that off, you criminal mastermind, go ahead on with your bad self.
How do the Rich Avoid Paying Taxes?
While many think not paying taxes is a myth, it is a reality for some of the filthy rich folks floating around. The simplest way of looking at it is that taxes are generally focused on income. These uber-wealthy Warbucks usually have most of their moola tied up in investments, so they don’t have to dole it out to the taxman.
How Much Should I Deduct From My Business For My Salary?
This is an area of much debate for small business owners everywhere. The answer? There isn’t one. According to Nicole Fallon, “An alternative method is to pay yourself based on your profits. The SBA reports that most small business owners limit their salaries to 50 percent of profits.”
I can attest to the fact that I, for one, made sure that all of my employees were paid before I paid myself when days were lean. I don’t believe that all business owners adhere to that ideology, but they should.
Benefits to Building a Business as a Young Person
There are many benefits to starting a business sooner rather than later, and most of them are nothing more than common sense.
Make More Money for a Longer Period.
When you start a business, the younger you are, and the sooner you become successful in your niche, the longer you have to bring in bigger bucks. Of course, this is contingent upon your success, but the odds are in your favor if you start in the right way.
Entrepreneur.com supports that theory by saying, “Yes, it’s an optimistic scenario, but an achievable one, even if it takes you two or three tries to build a successful enterprise. The bottom line is, the more time you can spend as an entrepreneur, the better long-term returns you’re going to see.” I knew I could do it, and I bet with some stick-to-itiveness, I am sure you can, too.
It’s Less of a Risk Because Less is Riding on You
While I am forever the optimist, reality says that just because you start a business, there is no guarantee you will be successful (but I’m rooting for you).
Entrepreneur.com agrees by saying, “Just as happens in the financial markets, the younger you are, the better you’re going to be able to tolerate that risk. You’ll have fewer responsibilities, fewer commitments and much more time to make up any losses you incur. Therefore, starting a business as early as possible mitigates your potential losses.”
While it is not a very positive way to speak your success into the universe, it is a realistic way to view things.
You are Young and Everything That Comes With It
I can attest that about 25 years ago, it was much easier to get up and down the ladder to paint those eves and overhangs than it is for me today. For most of us, when we are young, our bodies just have more going for them.
Unless you’re Jack La Lanne, your body starts getting kind of busted by the time you’re about 40. When you’re in your 20s, you just have more energy and enthusiasm to carry out projects than when you’re middle-aged, and all you can think about most days is sitting on the bank with a pole in one hand and a cold one in the other.
Ira Wolfe Loves This Key Word: Adaptability.
“If I’m identifying opportunities, being able to have a willingness to make some mistakes, admit those mistakes, [and] to learn new skills” according to HR Guru, Ira Wolf, then I possess adaptability (3:43).
As a young person, you can learn new techniques and adapt to technology better than us “Geeks and Geezers.” That ability to adapt and change is good for business, whether you’re simply learning a new skill or scrapping a business plan and starting from square one.
Could Multiple Businesses be in Your Future?
Because you started young, you learned how to do things right, even if it took you a while to figure it out. But figure it out you did. And in a big way. You can take one successful business idea and turn it into a franchise or expand it into something grand. The longer you have to do those things, the greater of a chance for them to happen.
The Downsides of Taking on a Business While Young
Even though I don’t like to look at this side of the coin, it is a reality. Sometimes there are definite disadvantages to starting your own business as a younger person. But there are downsides to everything. Try not to dwell on the bad. But keep the rotten stuff in the forefront of your mind that you are always making sure to avoid like the plague.
Do You Know What You’re Doing?
The odds are you don’t. When you are young, you will inevitably be plagued by lack of experience. While we all have to start somewhere, even people who come into their business the way I did, born into it and doing it our whole lives, you still may not know what you are in for as a new business owner.
The hope is that your business will hold on long enough for you to work out the kinks, who knows how things will turn out? Immaturity and inexperience often play considerable roles in the success of young business owners.
Do You Even Have Time for It?
Because you are young, the odds are, your friends are too. Unless you possess a tremendous amount of discipline and self-control when your friends want to go out and party at the end of the week, you will too. Sometimes being a business owner doesn’t allow for a social life. And you definitely won’t have the freedom your friends do.
Taking up too much of your time could be a genuine reason your business won’t be successful. If you are unable to manage your time in a way where the company comes first, the business isn’t likely to succeed.
This comes down again to your priorities. If you want to have a lot of free time on the evenings and weekends to spend as you please, then you are going to be disappointed when you are reviewing books for the third time in a week while your friends are out for drinks.
On the other hand, you can rest easy knowing that you are taking the chance on something worthwhile and making a good long-term move. When your friends are still grinding away at their day jobs when they are 40, you will hopefully have a thriving business that you don’t have to pay attention to much anymore.
Show Them the Money?
You’re young. What are the odds you have enough money to start your own business and all of the expenses that will occur dealing with it? Slim to none? What are the odds a bank or a family member is going to be willing to invest the kind of money it takes to start a business in an unproven venture? Unless your dad is Bill Gates, again, the odds are not forever in your favor.
Like it or not, money is a tremendously important ingredient in the recipe for building a business. When you are young, you are a considerable risk to your investors, and there are not many of them out there who will be willing to bet on a baby.
In order to prove to them that you have the survivability to stick around and make good returns on their loans, it helps to already have an initial burst of money behind you. Also make sure that your business is in as good a place and it can be—and do your research.
This can be a huge hurdle for young people looking to get into ownership.
There is Nothing Certain in This Life but Death and Taxes
And unfortunately, there are no amount of shady business deals in the world that will get us out of the former. The latter? I do not recommend trying it!
However, understanding the tax concepts and advantages we’ve talked about today will go a long way towards being able to make the most out of owning a business when young. With the right attitude
One way you can ensure an early, well-funded retirement is to make sure you are taking advantage of every tax deduction that he can.