The Top 30 Tax Strategies for Business Owners and High Income Earners:

Strategy: Home Office

If your office space is located in your house, you can deduct your bills for utilities, homeowners’ insurance, homeowners association fees, security, and general repairs and maintenance. Mortgage interest and property taxes are deductible expenses if you qualify for home office deductions. You can deduct the percentage of the square footage of your office divided by the total square footage of your house.

Strategy: Travel Expenses

Business travel is allowed for several reasons for business owners. Often business owners are reluctant to take travel related to deductions for business or are unaware that with some simple strategies, they can deduct travel combined with a vacation.

• Travel for New Business: Traveling to identify new locations, potential M&A or to acquire new investment property is all deductible business travel. Travel to and from the location, in addition to costs (lodging, Uber, etc.) on days that business or meetings conducted are all deductible.
• Conferences & Seminars: Travel to attend conferences and seminars is also deductible, and vacations can often be tacked onto these trips. Travel to and from the location for the participants is deductible, as is lodging for conference/seminar nights. However, non-business and non-conference days are not deductible.
• Board Meetings: Board meetings in resort locations can be deductible as long as there is a clear business purpose and a reason for why the meeting cannot be held at the business primary location. For example: enticement for board members to attend. Travel costs for spouses and children are typically non-deductible, however, if they are involved in the business and have a business purpose for attending, the travel may be deductible. For example, if a child functions as a videographer for the CEO and travels for that purpose, his expenses would be deductible.

Strategy: Meal Categories

50 Percent Deductions:

• Lunch with a customer, client or employee associated with a business discussion
• Taxes and tips relating to a meal or entertainment activity
• Room rental for a dinner or cocktail party (assuming the event met the business relation test)

100 Percent Deductions:

• Transportation costs to and from a business meal or entertainment activity, may be 100 percent deductible or 50 percent depending on the facts.
• Meals provided on the employer’s premises for the employer’s convenience, if more than 50 percent of the employees are furnished meals for the employer’s convenience
• Promotional activities that are made available to the general public
• Employer-provided social/recreational expenses primarily for the benefit of employees who are not highly compensated, such as a summer picnic or holiday party
• Business gifts up to $25 to any one individual per tax year

Nondeductible Items:

• Lunch with customer, client or employee without a business purpose/discussion
• Ticket price for sporting event that you do not attend
• Club dues; for example, country clubs, golf and athletic clubs
• Lavish or extravagant entertainment expenses (basically unreasonable expenses)
• Under TCJA, entertainment deductions are eliminated. Based on IRS guidance issued Oct 3, 2018, meals will continue to be deductible.

Strategy: Hiring Children & Grandparents

Sole-proprietors and spousal partnerships can pay children up to $12,000 without incurring any tax neither income nor payroll for legitimate services rendered to the business based on a market rate of pay. S and C corporations and non-spousal partnerships can also take advantage of this strategy; however they are not exempt from payroll taxes, social security, and Medicare. The business can take the deduction for the pay and on the child’s tax return. If it is less than the standard deduction, thereby reducing taxable income to zero.

Strategy: Maximize Depreciation

• Normal Depreciation: Confirm assets are properly capitalized and being depreciated. Many times this is not being done properly or at all by their current accountant. For example, a recent client owned a commercial building that was not capitalized or being depreciated, and the accountant had only the rental operations on the books.
• Expense: The IRS allows for expensing items under certain limits, like small tools and equipment. The business sets a reasonable policy for capitalization limits, then expenses individual items under that limit. For example, if a client establishes $1,000 as the limit and buys a computer for $800, the computer would be expensed rather than depreciated.
• Bonus Depreciation: In order to qualify for percent bonus depreciation, the original use of the property must begin with the taxpayer and the property must be: 1) Modified Accelerated Cost Recovery System (MACRS) property with a recovery period of 20 years or less, 2) depreciable computer software, 3) water utility property, or 4) qualified leasehold improvement property. Certain acquisition requirements and placed in service dates must also be met in order to qualify for 30, 50, or 100 percent bonus depreciation, and are discussed in more detail below.
• Section 179: Similar to Bonus Depreciation, Section 179 allows full expensing of acquired assets (up to certain limits). Most equipment, furniture & fixtures (MACRS property) qualifies for Section 179 treatment.

Strategy: Health Care Strategies

• 2% or greater S-Corp shareholders can either be reimbursed for health insurance premiums or the S-Corp can directly pay health insurance premiums. Under either method, the S-Corp can deduct the cost. The amount paid for health premium must be included in W-2 earnings for the shareholder, exempt from FICA. Shareholder then deducts the premiums on 1040 as a self-employed health insurance deduction.
• Partners in a partnership may also elect the same treatment for insurance premiums; however premiums must be included as Guaranteed Payments since partners should not be paid salary or wages from a partnership they own.
• Sole-proprietors can pay for and deduct insurance premiums on their 1040 as self-employed health insurance deduction.

Strategy: Fringe Benefits

• Disability Insurance: Taxable, but exempt from FICA & Unemployment
• Group Term Life: up to $50,000 for regular, non-shareholder employees
• Qualified Moving Expenses: eliminated under TCJA
• Qualified Transportation Costs: taxable and subject to FICA for shareholder
• Qualified Dependent Care: total benefit provided to > 5% shareholders must be less than 25% or all benefits to all participants are taxable
• Working Condition Benefits: corporate car, smartphone & service, job related education
• De Minimus Benefits: use of company copy machine, small gifts, occasional parties & picnics, occasional theater or sporting events
• No Additional Cost Benefits: use of benefits from points and miles programs, Qualified Employee Discount Programs

Strategy: Accountable Plans

An accountable plan allows employees, and in this case owner employees, to be reimbursed for expenses paid out of pocket. The expenses become deductions to the business and the employee or employee-owner can be reimbursed, creating non-taxable cash flow to them. In order for this plan to be a “Qualified Accountable Plan” it must have the following connection points:

• Business Connection
• Substantiation (Expense Reports – with receipts)
• No Excess Payments
• Timeliness (30-Day Rule)

If not disbursed under an accountable plan, the payments to the employees could be considered additional wages by the IRS.

Examples: mileage, auto, home office, travel, meals, & entertainment. Consider using a mobile app like www.mileiq.com to aid in documentation.

Strategy: Medical Reimbursement Plan

There are multiple medical reimbursement plan strategies available to small businesses. They range in their ability to create tax savings. Each Medical Plan has different rules and you MUST follow them in order to qualify for the rules:

• IRC Section 125: Pre-tax deduction is still the BEST way to deduct employee paid Group Health Insurance from a paycheck. It also allows for Group Term Life plans, FSA’s (Flexible Spending Accounts), and elective defined contribution plans.
• IRC Section 105 Plan (HRA): Normally done with a Schedule C or SMLLC. It can be done with a Family Management Company. Viable if: a) business employs at least one employee (can be a spouse), b) are over 25, and c) reasonable compensation is paid (benefits apply to compensation). The following expenses qualify: premiums paid from spouse W-2 (other job), Long Term Care Ins, any medical expense on Form 1040, or Special Needs Child Expenses.
• HSA: Medical savings account for taxpayers that have a high deductible. This account can grow tax deferred, similar to an IRA. Contributions are tax deductible and qualified distributions are tax free. Unlike an FSA, an HSA does not go to zero at the end of each year and unused contributions can be continually rolled over to help fund retirement.
• QSEHRA: Qualified Small Employer Health Reimbursement Account - Company funded account that allows for reimbursement of medical expenses if health insurance is not offered by the employer. This reimbursement can be considered as part of the employee’s compensation package. Reimbursements are flexible and have a max contribution amount. The benefit is shown on Form W-2 in box 12, code FF.
• IRC Section 401(h): A retirement plan with a medical twist. The account is attached to a Cash Balance Plan (defined benefit plan) that is offered by the employer. It is funded with pre-tax dollars, grows tax deferred, allows for tax free qualified withdrawals and also allows for tax bracket shifting opportunities.

Strategy: Home Administrative Office

Business owners who have a business location outside of their home, but also maintain a home administrative office for running the business can claim the home office as their primary office. As a result, all mileage for business purposes from the home office is deductible, including trips to office(s) outside of the home.

Strategy: Schedule C To S-Corp

A sole-proprietor operating with an LLC can elect to be treated as an S-corporation for tax purposes. By moving operations off of the individual’s tax return, the 15% self-employment tax is eliminated on earnings up to $128,400 and 2.9% on income greater than $128,400. S-corporation shareholders are required to receive reasonable compensation (RC) from the S-corp. Savings calculation is based on the difference between RC and income up to $128,400 times 15% and 2.9% on differences above $128,400.

Strategy: C-Corp rather than S-Corp

In a business where substantial profits are being reinvested into the business than being distributed to owners, a C-Corporation structure may be more beneficial. Under TCJA, corporate income tax rates are a flat 21% where individual tax rates on pass-through income are likely much higher. The tax savings calculation will be the differential between the individual owner tax rates and the corporate tax rate.

Strategy: Late S Elections

The IRS facilitates the grant of relief to late-filing entities by consolidating numerous other revenue procedures into one revenue procedure and extending relief in certain circumstances. This procedure provides guidance for relief for late:

• S corporation elections
• Electing Small Business Trust (ESBT) elections
• Qualified Subchapter S Trust (QSST) elections
• Qualified Subchapter S Subsidiary (QSub) elections
• Corporate classification elections, which the entity intended to take effect on the same date that the S corporation election would take effect.

Generally, the relief under the revenue procedure can be granted when the entity fails to qualify solely because it failed to file the appropriate election under Subchapter S timely with the applicable IRS Campus and all returns reported income consistently as if the election was in effect. Please note that for purposes of this guidance, the “effective date” is the date the election is intended to be effective.

Strategy: Profit-Sharing Retirement Plan

A profit sharing plan is a type of defined contribution plan that lets companies help employees save for retirement. With a profit sharing plan, contributions from the employer are discretionary. That means the company can decide from year to year how much to contribute (or whether to contribute at all) to an employee’s plan. If the company does not have a profit, it does not have to make contributions to the plan. (But a company does not need to be profitable to have a profit-sharing plan.) This flexibility makes it a great retirement plan option for small businesses or businesses of any size.

Strategy: Traditional 401(k)

A 401(k) plan is a qualified employer-sponsored retirement plan that eligible employees may make salary-deferral contributions to on a post-tax and/or pre tax basis. Employers offering a 401(k) plan may make matching or non-elective contributions to the plan on behalf of eligible employees and may also add a profit-sharing feature to the plan. Earnings in a 401(k) plan accrue on a tax-deferred basis.

Strategy: Roth 401(k)

A Roth 401(k) is an employer-sponsored investment savings account that is funded with post-tax money up to the plan’s contribution limit. This type of investment account is well-suited to people who think they will be in a higher tax bracket in retirement than they are now.

Strategy: Cash Balance Plan

A cash balance pension plan is a pension plan in which an employer credits a participant’s account with a set percentage of his or her yearly compensation plus interest charges. A cash balance pension plan is a defined benefit plan. As such, the plan’s funding limits, funding requirements and investment risk are based on defined-benefit requirements: as changes in the portfolio do not affect the final benefits to be received by the participant upon retirement or termination, the company solely bears all ownership of profits and losses in the portfolio.

Strategy: Self-Directed Retirement Funds

A self-directed individual retirement account (SDIRA) is an individual retirement account (IRA) in which the investor is in charge of making all the investment decisions. The self-directed IRA provides the investor with greater opportunity for asset diversification outside of traditional stocks, bonds, and mutual funds.

Self-directed IRAs can invest in real estate, private market securities and more. All securities and investments are held in an account administered by a custodian or trustee.

Strategy: 412(e)(3) Plans

In a 412(e)(3) plan, each participant is provided with a guaranteed, pre-determined benefit amount that is defined by the plan document and fully insured by the purchase of fixed annuity or life insurance and annuity contracts. Because plan benefits are guaranteed, 412(e)(3) plans are exempt from the funding requirements of IRC Section 41. Any “excess” interest earnings (or dividends, if paid) over and above the life and annuity contract guarantees are used to reduce the next year’s plan contribution.

Strategy: Defined Benefit Plans

A defined benefit pension plan is a type of pension plan in which an employer/sponsor promises a specified pension payment, lump-sum on retirement that is predetermined by a formula based on the employee’s earnings history, tenure of service and age, rather than depending directly on individual investment return

Strategy: Captive Insurance

A Captive Insurance Company is an insurance company established with the specific objective of insuring risks emanating from their parent group. This is an alternative form of risk management that is becoming a more practical and popular means through which companies can protect themselves financially while having more control over how they are insured. In essence, a business can choose to pay tax deductible premiums to its own Captive, instead of a 3rd party, saving itself the profit margin that would otherwise have to be paid to that 3rd party.

Benefits include savings to the bottom line as well as a reduction in risk exposure resulting from more targeted coverage. In addition, many Captives have developed into profit centers with reserves that accumulate tax free when premiums are in excess of claims, and when excess reserves are pulled out of the Captive they are taxed at Capital gains rates rather than ordinary income rates.

Strategy: Augusta Loophole

The IRS allows a business owner to rent their primary residence or a vacation home to their business for up to 14 non-consecutive days each year. The residence can be located anywhere in the United States and the income is excluded from taxable income for the residence owner / business owner.

The rental is established with a lease agreement between the business and residence owner, with pricing supported by researching and documenting comparable space for a similar event.

Strategy: QEAAP

Qualified Plan for Employee Achievement Award program: An achievement award that is given under an established written plan that does not discriminate towards highly paid employees. Normal awards are $400 per employee, but can be as much as $1,600 if an employee is given multiple awards or the individual awards are greater than $400. Awards are normally given based on length of service by an employee. Owner-employees of S-Corps do not qualify for this tax break. The award must be given in the form of a tangible asset and not cash. The employee can choose their award as long as the cost does not exceed the maximum.

Strategy: 1031 Exchange

Allows the exchange of like property with indefinite deferral of gains resulting from the disposition of the property being sold. Exchange is a misnomer and the transaction is the combination of a sale of the original property combined with the acquisition of a new, like property. However, both the sale and acquisition must be conducted through a qualified intermediary for the transactions to qualify under Section 1031. Once the sale is made (through the intermediary), the taxpayer then has 45 days to identify new property and 180 days to execute the transaction (also through the intermediary). The TCJA eliminated many classes of property from 1031 exchange; however, all real estate still qualifies.

Tax can be triggered if cash is received or debt is reduced as a result of the exchange.

Strategy: Cost Segregation

When a building is acquired, rather than just capitalizing the building and land as assets, a cost segregation study can be performed to identify other classes of assets within the building. For example, personal property items like carpet, light fixtures, kitchen appliances, landscaping, driveways, sidewalks, decks, etc. can be broken out to shorter class lives (5, 7 & 15 years). The shorter asset life classes can use accelerated depreciation, and may also qualify for treatment under bonus depreciation and Section 179. Compared to straight line depreciation at 27.5 or 39 years on the building, a cost segregation study can create significant tax savings in the earlier years of the ownership of the building.

Properties with values greater than $500,000 will need a cost segregation study completed by an engineering consulting firm that specializes in preparing the studies. Software is available for cost segregation studies on residential rental properties valued at $500,000 or less.

Strategy: Passive Real Estate Losses

Passive real estate losses (from investments) can help offset income from active real estate professionals, taxpayers with less than $150,000 taxable income (MFJ) or $75,000 (single), and taxpayers with passive income.

Strategy: FICA Tip Credit

The Tip Tax Credit is a credit that is equal to the social security and Medicare taxes paid on the tips received by the employees. The business can claim this credit. No credit is given for tips used to meet the federal minimum hourly wage rate. A business cannot claim both the credit AND the expense deduction. If the business claims the credit, they must reduce social security and Medicare tax deductions accordingly. The credit reduces tax liability dollar for dollar and passes through to partners or shareholders of partnerships and S corporations.

Strategy: Research & Development Tax Credit

The Research & Experimentation Tax Credit or R&D Tax Credit is a general business tax credit for companies that incur research and development (R&D) costs in the United States. In order to qualify, they must:

• Be Technological in Nature
• Be Used for a Permitted Purpose
• Involve the Elimination of Uncertainty
• Involve a Process of Experimentation

Only certain direct and indirect expenses will qualify for the credit. In order to claim the credit, it must be on a timely filed tax return (including extensions) and can offset either income taxes or payroll taxes.

The following industries see the R&D Credit the most (this is not an all inclusive list) 

• Manufacturing & Fabrication
• Software Development
• Engineering
• Architecture
• Life Sciences & Pharmaceutical
• Machining
• Aerospace & Defense
• Food Science
• Tool & Die Casting
• Foundries
• Automobile
• Chemical & Formula

Strategy: Self Employed Health Insurance Premium Credit

Self Employed Health Insurance Premium Credit was created by The Affordable Care Act to encourage and benefit small employers who provide health coverage for their employees. It is also known as The Small Business Health Care Tax Credit. To qualify, the employer must have less than 25 full time employees, employees must have average wages of $50,000 (adjusted for inflation), and the employer must pay a portion of health insurance for employees. Currently this credit is only available for up to two years, is claimed against income tax, and is claimed on Form 8941.

Strategy: Work Opportunity Tax Credit

The Work Opportunity Tax Credit is a Federal tax credit available to employers for hiring individuals from certain target groups who have consistently faced significant barriers to employment. You must survey an employee when you hire the employee (Prescreen), then you must file Form 8850 in a timely manner. The last step is for you to take the credit on your income taxes (this does not offset payroll taxes). The individuals qualified for the WOTC are as follows:

• Families on Food Stamps
• Families with LT or ST Temp Assistance (with dependents)
• Qualified Veterans
• Qualified Ex-Felons
• Individuals Completing Vocational Rehab programs
• Empowerment Zone Youths
• Limited Unemployment Recipients