3 Criminally Underused Tax Deductions For Businesses

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 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:

1. Depreciate your asset to zero (e.g., a car or computer used for business).
2. 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.

1. Host monthly meetings with your board of directors and rent your house for these purposes.
2. 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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