3 Overlooked Tax Deductions for Business Owners
Episode 17: In this episode, Timalyn reminds us that we’re 6 weeks away from the end of the year. With that in mind, she’s offering 3 overlooked tax deductions for business owners. These deductions are not income-restricted. You can make as much as you want and still be able to put these tax deductions to work for you, assuming you actually made money in your business. It’s time to get your pen and paper. Let’s join Timalyn for today’s discussion.
What Can You Do to Reduce Your Tax Liability?
Timalyn begins with this important advice. Don’t wait until you’re 6 weeks away from the end of the year to think about tax planning. Invest in a 2023 tax plan. This will enable you to be proactive, rather than reactive.
What Is a Tax Deduction?
To qualify, an expense must be both ordinary and necessary. Buying a yacht in your company name is nice but not always considered ordinary or necessary. Therefore, you would want to make sure it meets all of the qualifications to be a legitimate tax deduction.
A tax deduction reduces your tax liability, but it’s different than a tax credit. As an example, Timalyn assumes XYZ Company had an income of $80,000. It made an ordinary and necessary purchase of $20,000. The taxable income is now $60,000. For more on this, check out Timalyn’s blog post, “15 Tax Terms Every Taxpayer Should Know.”
Tax Deduction #1 - The Self-Employment Tax Deduction.
This is not listed on your Schedule C or your 1120. It’s actually listed on Schedule 1 of your 1040. This deduction is half of the amount of your self-employment tax. This tax is a business owner’s share of social security and Medicare. Sole proprietors (Reminder: single-member LLCs are sole proprietors) and partners pay self-employment tax. Timalyn explained self-employment tax in more detail in Episode 8 of Tax Relief with Timalyn Bowens.
A W-2 employee only pays half of the social security and Medicare tax (FICA). The employer pays the other half and receives a tax deduction for this expense. This is the logic behind granting the self-employment tax deduction for sole proprietors and partners.
Click here to watch Timalyn explain, what self-employment tax is.
Timalyn reminds business owners that the expense must have actually been incurred in order for them to be eligible to take the deduction. Self-employment tax is roughly 15.3%, so you would be able to deduct half of that amount.
Did you miss the self-employment tax deduction for the previous year or years? If you answered yes, you may want to check out Episode 16, “How to Choose a Tax Professional.”
Tax Deduction #2 – Self-Employed Health Insurance Deduction
Before she begins, Timalyn stresses the difference between various insurance expense items on Schedule C and health insurance expenses. The self-employed health insurance deduction is listed on Schedule 1 of the 1040. Insurance premiums paid for you, your spouse and any children under the age of 27 are deductible. There are 2 important caveats.
- First, you have to have made a net profit in your business for the year being reported.
- This is for sole proprietors or partners.
- A W-2 employee of their own S-corps, assuming they are more than 2% shareholder also qualify.
- Second, you can’t deduct this expense if you are eligible to be on another insurance plan, such as your spouse’s group plan offered by his/her employer.
It’s important that you consult with a qualified, tax professional. There are some important guidelines that need to be considered.
Check out Timalyn’s GoodRX article, What Is the Self-Employed Health Insurance Deduction? Are You Eligible? for more details on this deduction.
Tax Deduction #3 – HSA Contributions
An HSA is a Health Savings Account. You are required to have a high-deductible health insurance plan, to qualify for an HSA. If you’re eligible for the 2022 tax year, you can contribute up to $3,650 as an individual. If you’re 55 years old or older, you can contribute an additional, “catch up contribution” of $1,000. If you have a family high-deductible plan, you can contribute $7,300, for 2022.
The funds in your HSA enable you to pay for healthcare expenses with tax-free money. Contributions to your health savings account lower your taxable income. Any balance left in the account at the end of the year will automatically rollover to the following year. It’ll gain tax-free interest and will not impact the eligible contribution limit for that following year.
It’s a terrific option, if you qualify for it. Here are some additional resources for your review:
Timalyn hopes these 3 overlooked tax deductions for business owners are helpful. You may have been aware of 1 or more of them. However, she encourages you to share this info with other business owners who may not be familiar with these tax deductions. They’ll thank you.
As we conclude Episode 17, we encourage you to connect with Timalyn on social media. You’ll be able to subscribe to this podcast on Spotify, Apple Podcasts, Google Podcasts, and many other podcast platforms.
Remember, Timalyn Bowens is America’s Favorite EA and she’s here to fill the tax literacy gap, one taxpayer at a time. Thanks for listening to today’s episode.
For more information about tax relief options, visit https://www.americasfavoriteea.com/ .
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Disclaimer: This podcast is for informational and educational purposes only. It provides a framework and possible solutions for solving your tax problems, but it is not legally binding. Please consult your tax professional regarding your specific tax situation.