Save on Taxes: How to Pay Like a Millionaire
Here are some of the most common tax mistakes that business owners make. Are you getting any of these wrong?
The millionaires and the billionaires seem to know something that we don’t as it relates to taxes. Warren Buffett pays a higher tax rate than his secretary. Mitt Romney makes millions of dollars every year, but pays less than 15% in income tax.
These headlines make for great political fodder, but they got me thinking about my own taxes. As a small business owner, am I paying more than I should?
Two big areas of tax reduction for the ultra-rich people stem from the source of income: They get their income from capital gains and interest income, not salary. Those are not on my immediate horizon for managing my taxes. But I discovered you don’t need to open up offshore accounts and shady shell companies to pay less taxes.
I reached out to a few of my own advisors–tax accountant, financial advisor and lawyer–to find out how small business owners can do a better job of legally (and ethically) paying only their share of taxes. From those conversations emerged a list of the most frequently missed opportunities for business owners.
Common Tax Mistakes
Now of course, you will need to talk to your own advisors to make certain how to best use these ideas. But for that discussion, you want to be sure to mention these common tax mistakes.
- Not taking advantage of accelerated depreciation rules. Under certain circumstances, you can make an election to get a full deduction in the year of purchase for a variety of business purchases. Computers, phone systems, vehicles and other purchases can be deducted according to an accelerated schedule. Depending on how your profits look in a particular year, this can be a great deduction.
- Improperly matching revenue and expenses. This area has a lot of components to it, so make certain to get good advice. The problems that were cited most often included: not recording all the expenses associated with the business, not putting the deductions in the correct period, and not managing the accrual cycles correctly. You are allowed certain flexibilities to recognize your revenue and expenses in a way that provides you a tax advantage–and you should make certain you are following it.
- Not taking advantage of retirement plan funding deductions. This way of sheltering income from taxes was given as the most often missed or underutilized tax-saving opportunities for business owners.
- Not taking all of the legal home office deductions. It’s not just the office itself: If you have a true home office, you might also have a dedicated business phone line, Internet connection, office supplies and so on. Just make sure everything is truly dedicated to your business alone: Home offices are an audit red flag.
- Not keeping business expenses separate. The best way to make certain you capture every deduction and keep accurate, current records is to establish a separate checking account and credit card for all of your business expenses. Don’t mix your personal and business records; it’s flirting with disaster. Besides, most business credit cards will provide enhanced reporting that makes your record keeping easier and more accurate.
Surround yourself with a great financial team and take every deduction to which you are legally allowed. The millionaires know: It’s not about how much money you make, but about how much you keep.