If you're a business owner, these are three underused tax reductions that you need to know about. Before we get started though, this is not tax advice, so make sure to go over these deductions with your tax professional.
Understanding Tax Deductions
In simple terms, tax deductions are like the discounts on the money you have to pay in taxes. When you have certain expenses that are deductible, those can be subtracted from the total amount of money that you made that year. The deductions lower your taxable income based on your highest federal income tax bracket. So if you fall into the 22% tax bracket, a thousand-dollar tax deduction would save you $220.
What a tax deduction is not is a tax credit. The difference between them is:
- A tax deduction lowers your taxable income.
- A tax credit directly reduces your tax bill.
For example, a tax credit of a thousand dollars lowers your taxes by a thousand dollars.
1. GIF Leaseback Technique
This technique allows you to deduct your assets twice. Here's how it works:
- Depreciate your asset to zero (e.g., a car or computer used for business).
- Give it to someone in a lower tax bracket and lease it back.
Benefits include reduced taxes for you and income gained for the person in the lower bracket (e.g., a kid in college who needs financial assistance). Although they'll pay some taxes on it, they'll likely pay less due to being in a lower bracket.
Note: This is a high-level strategy, so consult your tax professional before using it.
2. Home Office Deduction
If you run a business from home, CPAs can help you divide the square footage of your home office by the total area of your home to find business use. For example, a 100 square foot office in a 2,000 square foot house would be a 5% business use.
There's a little-known loophole:
- Find the blueprints and familiarize yourself with the dimensions.
- Eliminate common areas like hallways or throughways.
By eliminating 400 square feet of hallways, your deduction increases from 5% to 6.25%.
3. Augusta Rule
This rule allows you to rent your house up to 14 times per year without needing to report rental income on your tax returns. It applies to any home in the United States and is especially useful for business owners.
- Host monthly meetings with your board of directors and rent your house for these purposes.
- Deduct the rent payment from your business tax return.
Important: Ensure appropriate documentation, don't charge excessive rents, and note that this doesn't apply to sole proprietorships or single-member LLCs.
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Full Transcript
If you're a business owner, these are three underused tax reductions that you need to know about. Before we get started though, this is not tax advice, so make sure to go over these deductions with your tax professional. In simple terms, tax deductions are like the discounts on the money you have to pay in taxes. When you have certain expenses that are deductible, those can be subtracted from the total amount of money that you made that year. The deductions lower your taxable income based on your highest federal income tax bracket. So if you fall into the 22% tax bracket, a thousand dollar tax deduction would save you $220. What a tax deduction is not the tax credit. The difference between them is a tax deduction lowers your taxable income while a tax credit directly reduces your tax bill. For example, a tax credit of a thousand dollars below your taxes by a thousand dollars. The first deduction is called the GIF leaseback technique and allows you to deduct your assets twice. Let's say I have a car, a computer, or any other equipment you've used for your business. Though this can be used for non-business assets also. Once I've depreciated that asset down to zero, meaning I've already taken all the deductions I can get from it, I can give that to someone else in a lower tax bracket and lease it back from them. Now, why would you want to do that? Let's say you have a kid in college that needs some financial assistance. Rather than just giving them money, you give them the asset, rent it back, they get the income on it, and you get to keep using the asset. For example, you give them your car and lease it back. You get the right off for the lease expense, reducing the amount of taxes you pay, and they get the income. Now, they'll probably have to pay some taxes on it income, but they're in a much lower tax bracket than you are, so the net money to the government is minimized, and you keep that money working for your family more efficiently. This is a very high-level strategy, and there are other rules that you need to be aware of. So again, speak with your tax professional before using this. The second deduction is for anyone who runs their business from their home. CPAs will usually divide the square footage of your home office by the square footage of your home to find business use. So if we assume your home office is a hundred square foot bedroom in a 2,000 square foot house, we would have 5% business use. This means you'd be able to deduct 5% of your mortgage interest, alarm services, utilities, long care, and a whole bunch of other stuff. What most at-home business owners don't know is a little loophole I like to call the Blueprint Magic Trick. So first, you want to find the Blueprints and familiarize yourself with the dimensions, and then eliminate any common areas in your house like hallways or throughways. Let's just say you could eliminate 400 square feet of hallways. Now, you have 100 feet divided by 16 hundred square feet instead of 2,000, which is 6.25% deduction instead of 5%. You just increase your deductions by 25% without lifting a finger. The third tax deduction is one you may be familiar with, but I'm going to show you how it can be used for your business to put a large amounts of tax-free money from your business into your pocket. It's called the Augusta Rule, and it allows you to rent your house up to 14 times per year without needing to report rental income on your tax returns. This rule applies to any taxpayer who owns a home in the United States and includes primary and secondary residents and even vacation homes. Now, where this becomes really powerful is for business owners. For example, you host a monthly meeting with your board of directors. Under the Augusta Rule, your business can pay you a reasonable amount to rent your house to conduct your monthly meetings. You are then able to deduct the rent payment from your business tax return, and you won't have to report it as income on your personal taxes. But before you go trying to rent your house for $100,000, you must first understand the rules behind the strategy. First, and potentially the most important, if you are renting your own home through your business, it's critical that you have a detailed documentation of your work. This could include printing rental quotes for similar locations, keeping track of minutes worked, and other records of business discussions. Second, your house cannot be your primary place for business. Third, this business deduction is not available for sole proprietorship or single-member LLCs. In other words, if you want to use this as a business deduction, you need to file as an S-Corp or a C-Corp. And finally, the rents you pay cannot be unreasonable, meaning you can't charge your business $10,000 a night if other homes similar to yours are only going for $1,000 a night. In summary, the Augusta Rule is a really great strategy to take money that is taxable in one pocket and move it over to a tax-free pocket. And finally, for a bonus, if you want to learn how to sell your home to your S-Corp and exclude up to a quarter to a half a million dollars from your home sale profits, then click the link below and grab a free copy of the code breaker, which will walk you through this strategy and seven other underused tax deductions. If you found value from this video, consider subscribing or sharing with other people that could value from this information. We'll see you on the next video.
