By Justin Pothoven, CPA, Client Advisor and Kansas City Office Director
It is never too early to start planning for taxes. At Engage Advisors, we’re constantly thinking about ways we can help our clients keep more of their hard-earned money. Here are a few solid suggestions that can make a noticeable dent in your tax bill:
1. End-of-Year Vehicle Purchase Offers Big Tax Savings
If you buy a vehicle for your business, you’re allowed to deduct up to 100% of the cost based on the percentage you use the vehicle for work, with a minimum requirement of 50%. It’s worth noting that if you’d like to accelerate 100% of the deduction into the first year, a business vehicle needs to be 6K lbs. or more, which means you’re looking at one of the bigger SUVs or trucks.
From a tax perspective, we recommend buying the vehicle late in the year because that increases your ability to deduct the full purchase price right away. It’s the difference between deducting 100% the year you buy it, versus spreading deductions out over several years. Here are two scenarios to explain the difference. Let’s say you buy the vehicle in July and from the date of purchase until December 31, you use it for work 60% of the time. In this scenario, when you file your taxes, you can deduct 60% of the vehicle cost (assuming it’s over 6k pounds). Now, let’s say you purchase the vehicle mid-December and use it exclusively for work. In this scenario, you would be entitled to deduct the full cost of the vehicle that year. By owning the vehicle for a few weeks rather than six months, it’s easier to be disciplined about only driving it for work. Even if you only drive it 50 miles, so long as it’s 100% for business, you can deduct the full amount. The cost of these vehicles can easily range from $30K to $75K, which makes the difference between 60% and 100% in tax deductions significant.
2. Hiring Your Kids Lowers Your Tax Bill
Making work part of family life is good for your children and your bottom line. For your kids, it’s a chance to develop a sense of responsibility, some work skills and maybe increase their college savings fund. They need to do actual work on a regular basis – in other words, it needs to be a real job. Beyond that, what they do is up to you. Younger kids can come in once a week and empty out waste baskets or run the vacuum in the reception area. Older kids can help at the front desk or manage your social media profile. Whatever the job, having them on the payroll provides several tax-reducing benefits. Let’s say your daughter earned $10,000 in a year. First,
you get to deduct the $10,000. Then, when she files her taxes, she’ll get a refund because she doesn’t earn enough to make it a taxable event. Her income could go towards long-term savings such as a college fund or a Roth IRA account, or maybe it goes toward her living expenses, such as her cell phone, gas for the car or clothing purchases. The main point is that you’ve lowered your business taxes while providing tax-free income to the family.
3. Accelerate Depreciation on Building You Own
A lot of dentists own the building that houses their practice. While owning a commercial property is a good investment, it’s generally not the best tax strategy because the depreciation stretches out over 39 years. If you’ve purchased or remodeled your office within the last 3 years, a Cost Segregation Study can speed things up considerably by accelerating depreciation deductions and deferring federal and state income taxes. Here’s how it works – instead of thinking about your property as one unit, think about it as different parts that consist of interior and exterior components. On average, 20% to 40% of those components fall into tax categories that can be written off much faster than the building structure. A Cost Segregation Study breaks down and sorts out all the different components that make up the total structure with the goal of identifying all property-related costs that can be depreciated over 5, 7 and 15 years. For example, everything related to dental equipment qualifies for five-year depreciation. The same five-year depreciation applies to certain kinds of components dedicated to appliances or computers. If you recently completed a large remodel, those components could qualify for 15-year treatment, making them eligible for 100% first year depreciation.
Anyone who has recently purchased, constructed, or remodeled a property should consider conducting a study. The cost typically ranges from $3,000 -7,000, but that amount can easily be made up in the first year of deductions alone. If you own a building worth $500,000, instead of it taking almost 40 years to recoup the costs, you might be able to deduct a large portion in the first 10 years. That makes paying for a Cost Segregation Study a worthwhile investment.
4. Choose the Right Retirement Plan – Give 401Ks a Good Look
A lot of dentists think a 401K plan is too expensive, so they opt for something cheaper, with lower compliance costs like a simple IRA plan. The fact is, 401Ks are a great option for practice owners, if structured properly. With a 401K, you can deduct up to $19,500 in retirement contributions for yourself, which is significant. Plus, if your spouse is on payroll, you can deduct the same amount for them. You can even set it up so that the majority of what your spouse earns goes to fund the payroll plan, so they have no taxable income. It’s a good way to maximize both retirement savings and tax deductions. An added benefit to a 401K is that your staff will love it, making it a great tool for recruitment and retention. In our current climate where good employees have lots of options, that extra benefit is worth something.
Tax laws are always changing and it’s not easy to stay current, especially when you’re busy running a business. Contact Engage Advisors to make sure your tax plans are up to date and that you’re making the most of all the deductions available to you. We’ll work hard to help keep your money in your pocket!