Running a small business comes with its challenges, but it also provides unique opportunities to boost your overall financial health. One lesser-known advantage for business owners is the potential to generate secondary income by saving on taxes when certain personal expenses are run through the business, where legally allowed.
Let’s explore how this works and the various ways small business owners can use this strategy to reduce their tax burden, effectively increasing their bottom line.
1. Home Office Deduction: Use Your Home for Business
If you use a portion of your home exclusively for business purposes, you may be able to deduct home office expenses. These expenses include:
- Rent or mortgage interest
- Utilities (electricity, internet, etc.)
- Property taxes
- Maintenance costs
For example, if your home office takes up 10% of your home’s square footage, you could potentially deduct 10% of these expenses from your business income. This strategy not only lowers your tax burden but also allows you to benefit from costs you’re already incurring.
2. Vehicle Expenses: Write Off Part of Your Car Usage
If you use your personal vehicle for business purposes, you can deduct either a portion of the actual expenses (fuel, maintenance, insurance, depreciation) or use the IRS standard mileage rate, which is often more straightforward.
Let’s say 30% of your driving is for business purposes; you can then deduct 30% of your vehicle-related expenses. This approach converts personal car expenses into business deductions, leading to tax savings and boosting your disposable income.
3. Meals and Entertainment: Business-Related Dining
Meals with clients or prospective clients that are business-related can be deducted at 50%. Whether it’s closing a deal or discussing strategies, these meals count as legitimate business expenses.
However, make sure to keep a record of the purpose of the meal and who attended. While this deduction doesn’t apply to purely personal meals, there are opportunities to blur the line when business is conducted in tandem with social activities.
4. Travel Expenses: Deductible Business Trips
If you’re traveling for business purposes, you can deduct many associated expenses, such as:
- Airfare and lodging
- Meals (again, 50% deductible)
- Ground transportation
- Internet and phone charges while traveling
It’s important that the primary purpose of the trip is business-related, though personal days can be added on. For example, if you attend a business conference in another city and stay a few extra days for personal reasons, you can still deduct the business portion of the trip.
5. Cell Phone and Internet: Shared Business and Personal Use
If you use your personal phone or internet for business purposes, a portion of these expenses can be deducted as business costs. Similar to vehicle expenses, if 40% of your phone usage is for business, you can deduct 40% of your phone bill. Keep in mind to track these percentages carefully.
6. Health Insurance and Medical Expenses: Use a HRA
If you’re self-employed or own a small business, setting up a Health Reimbursement Arrangement (HRA) or using the self-employed health insurance deduction can allow you to pay for personal medical expenses and health insurance through your business. This strategy allows you to lower your taxable income while covering significant personal costs.
7. Depreciation of Equipment: Write Off Purchases
Business owners can write off the depreciation of business-related equipment, like computers, printers, and other office necessities. If you purchase new equipment for your business, you can either deduct it in full or spread the deduction over several years.
For small business owners using equipment that doubles as personal use, like a laptop or tablet, a percentage of the expense can be deducted.
8. Retirement Savings: Business Contributions to a SEP IRA
A great way to boost your secondary income is through tax-deferred retirement savings. Self-employed business owners can set up a SEP IRA or Solo 401(k), allowing them to contribute significantly more than standard personal retirement accounts. These contributions lower your taxable income for the year, offering immediate tax savings while securing your future.
The Key: Stay Legal and Keep Detailed Records
While this strategy offers many advantages, it’s essential to remain within legal bounds. The IRS is strict about classifying personal and business expenses, so it’s crucial to:
- Keep detailed records: Document the business purpose of each expense.
- Only deduct legitimate business expenses: Avoid mixing personal and business expenses indiscriminately.
- Consult a tax professional: Work with a qualified CPA or tax attorney to ensure you’re adhering to tax laws.
Conclusion: Building Secondary Income by Reducing Taxes
Running personal expenses through your small business, where appropriate and legal, can significantly reduce your tax burden. These savings act as a form of secondary income, allowing you to re-invest the money back into your business or use it for personal financial growth.
Always ensure you’re staying compliant with tax laws, but by leveraging these tax-saving strategies, you can maximize the financial benefits of running a small business.
