What Creative Deduction Strategies Have You Used for a Niche Business?
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What Creative Deduction Strategies Have You Used for a Niche Business?
In the complex world of taxes, accounting professionals are often the unsung heroes for niche businesses looking for creative deductions. From maximizing retirement contributions to hiring children for tax savings, here are the top four ingenious strategies recommended by CPAs and business founders.
- Maximize Retirement Contributions
- Unlock Value with Asset Leasing
- Deduct Weekend Business Travel
- Hire Children for Tax Savings
Maximize Retirement Contributions
A client of mine worked in a senior-level position in a specialized hospital and wanted to "supercharge" their retirement contributions. My client was eligible to contribute to a 403(b) and a 457 plan.
My client thought they could only contribute the max, $22,500, to only one of them. Contrary to their belief, they could contribute to both because the 457 is a separate deferral plan from the 403(b) and therefore does not count towards the maximum contribution limit of $22,500 for all qualified retirement plans.
In the end, I was able to help her contribute $45,000 in one year and tax-deferred. Because the contributions were pre-tax, the $45,000 combined contribution amount reduced her taxable wages significantly and therefore reduced her tax liability.
Unlock Value with Asset Leasing
Creating a new company to lease back fully depreciated assets is an innovative tax strategy that allows businesses to unlock hidden value from their existing equipment while optimizing their tax position. When a company's assets, such as machinery, vehicles, or equipment, are fully depreciated, they no longer provide depreciation tax deductions, despite still being functional and valuable. By establishing a separate leasing entity, the business can sell these fully depreciated assets to the new company at fair market value, generating an immediate influx of cash.
The leasing entity then leases the assets back to the original company, which continues to use them in its operations. This arrangement not only provides the operating company with liquidity but also creates new tax advantages. The leasing entity can depreciate the assets anew, taking advantage of fresh depreciation deductions, while the operating company can deduct the lease payments as a business expense, effectively reducing taxable income.
Furthermore, this strategy can improve balance sheets by converting fixed assets into cash while simultaneously keeping the assets in productive use. Additionally, structuring the lease terms can provide flexibility in cash flow management, aligning lease payments with the operating company's revenue cycles. However, to maximize the benefits and ensure compliance, it is crucial to properly structure the arrangement with fair market valuations and arm's-length lease terms.
This is just one of hundreds of strategies used by Excel Empire, a proactive tax strategy firm. Each situation is different, and no one strategy should be employed without consulting a Tax Professional who is knowledgeable about the specific situation. Tax advice without full context is bad advice.
Deduct Weekend Business Travel
Oh, there are so many! For those who travel for business and have meetings on a Friday and the following Monday, the weekend hotel and food expenses would be tax-deductible.
Hire Children for Tax Savings
At Financials Unlimited, we work with many different niche clientele. One of our favorite creative recommendations is for the clients to hire their children through the business. Whether it's for modeling, organizing, or other office tasks, this is a great way to save up to the standard deduction amount for all children under the age of 18 without paying Social Security or Medicare taxes. This provides an additional deduction through the business, as well as allows the owner to invest a portion of the savings into a Roth IRA for the added benefit of tax-free income in the future for the children.