Did you file your taxes late in October because you’re not equipped to take advantage of every available break and the extension is up so you had to file something? Are you satisfied with the taxes you pay? Is your tax advisor giving you proactive advice to save on taxes?
I’ve got bad news and I’ve got good news. The bad news is you’re right. You do pay too much tax. You’re probably not taking advantage of every tax break you can. And most advisors do a poor job of actually saving their clients money. The good news is, you don’t have to feel that way. You just need a better plan. This blog post will cover some of the biggest mistakes that creative business owners make. Download my free ebook that lists the mistakes and solutions here.
#1 Failing To Plan
The first mistake is the biggest mistake of all. It’s failing to plan. I don’t care how good you and your tax preparer are with a stack of receipts on April 15, or October 15 for that matter, if you didn’t know you could write off your kid’s braces as a business expense, there’s nothing we can do.
#2 Audit Paranoia
The second big mistake is nearly as important as the first, and that’s fearing, rather than respecting the IRS. What does the kind of tax planning we’re talking about do to your odds of being audited? The truth is, most experts say it pays to be aggressive. That’s because overall audit odds are so low, that most legitimate deductions aren’t likely to wave “red flags.”
#3 Wrong Business Entity
The next mistake is choosing the wrong business entity. Most creative business owners start as sole proprietors, then, as they grow, establish a limited liability company or corporation to help protect them from business liability. But choosing the right business entity involves all sorts of tax considerations as well. And many business owners are operating with entities that may have been appropriate when they were established – but just don’t work as effectively now.
#4 Wrong Retirement Plan
Now let’s talk about the fourth mistake: choosing the wrong retirement plan. If you’re looking to save more than the $5,500 limit for IRAs, you have three main choices:Simplified Employee Pensions, or “SEPs,” SIMPLE IRAs, or 401ks. I’m not here to make you an expert on retirement plans. But I can help you decide pretty quickly if the plan you have is right for you – or if you should be looking for something more suited for your specific needs.
#5 Missing Family Employment
Now let’s talk about the fifth mistake: missing family employment. Hiring your children and grandchildren can be a great way to cut taxes on your income by shifting it to someone who pays less.
• Yes, there’s a minimum age. They have to be at least seven years old.
• Their first $6,300 of earned income is taxed at zero. That’s because it’s the standard deduction for a single taxpayer – even if you claim them as your dependent. Their next $9,275 is taxed at just 10%. So you can shift a lot of income downstream.
#6 Missing Medical Benefits
Now let’s talk about health-care costs. Surveys used to show that taxes used to be small business owners’ biggest concern. Now it’s rising health care costs. If you pay for your own health insurance, you can deduct it as an adjustment to income on Page 1 of Form 1040. If you itemize deductions, you can deduct unreimbursed medical and dental expenses on Schedule A, if they total more than 10% of your adjusted gross income. But most of us don’t spend that much. What if there were a way to write off medical bills as business expenses? There is, and it’s called a Medical Expense Reimbursement Plan, or Section 105 Plan.
#7 Missing a Home Office
The home office deduction is probably the most misunderstood deduction in the entire tax code. For years, taxpayers feared it raised an automatic audit flag. But Congress has relaxed the rules, so now it’s far less likely to attract attention. Just about every singe magazine or internet article ever written about tax audits tells readers to “beware the home office”! It’s very likely the authors of those articles, who are hardly ever tax professionals, are leaving their money on the table or their readers’ money on the table.
#8 Missing Car/Truck Expenses
Now let’s talk about car and truck expenses. I don’t want to take too much time here, but I do want to point out the most common mistake clients make with these expenses. Most people take the standard deduction regardless of what they drive. There’s a wide variety of vehicles clients drive and yet the deduction is the same for them all.
Are you detecting a pattern here? That deduction is the same for everyone, no matter what we drive.
Do you think we all spend the same to operate our cars? It might surprise you to see how much it really costs to operate your car. And it’s not exactly 54 cents per mile! Every year, AAA publishes a vehicle operating cost survey. Costs vary according to how much you drive – but if you’re taking the standard deduction for a car that costs more than 57.5 cents/mile, you’re losing money every time you turn the key.
#9 Missing Meals/Entertainment
Let’s finish up with some fun deductions for meals and entertainment. The basic rule is that you can deduct cost for meals with a bona fide business purpose. This means clients, prospects, referral sources, and business colleagues. And let me ask you – when do you ever eat with someone who’s not a client, prospect, referral source, or business colleague? If you’re in a business like real estate, insurance, investments, or multi-level marketing where you’re marketing yourself, the answer might be “never.”
Be as aggressive as you can with what you define as bona fide business discussion! The general rule is, you can deduct 50% of your meals and entertainment, so long as it isn’t “lavish or extraordinary.” The IRS knows you have to eat, so you can’t deduct it all. But they’ll meet you halfway.
#10 Missing Tax Coaching Service
Now that you see how creative business owners miss out on tax breaks, let’s talk about the biggest mistake of all.
What mistake is that? As written earlier, the biggest mistake of all is failing to plan. Have you all heard the saying “if you fail to plan, you plan to fail”? It’s a cliché because it’s true. Fortunately, tax coaching can fix that mistake!
You need true tax planning that understands your creative business. I can coach you on what to do, when to do it, and how to do it. I start with an initial interview where I analyze your current situation. I “diagnose” your tax problems the way your doctor would diagnose a medical problem. Then I prepare a written tax plan that addresses your family, home, and job, your creative business, and your investments.
You may have heard of some of these or all of these already. That’s great! To learn more details on how to SOLVE these problems access the free ebook that outlines these again and includes the SOLUTIONS to avoid these mistakes. Download my free ebook so you can start walking in financial freedom soon.