Most people in business will spend the majority of their time creating methods of generating more income. In other words, they believe that the secret to becoming wealthy is simply to make more money. While no one can argue that making more money is important, their reasoning is fatally flawed. That’s because they are unknowingly throwing away an incredible amount of money each and every year. One of the biggest areas where you can be throwing your money away is by overpaying your taxes.
So what? You may say. What’s the big deal?
The big deal is that taxes are one your largest business expenses. They can eat up as much as 50% of every dollar that you earn. That one misstep alone could be costing you thousands and thousands of dollars every year. That’s the bad news.
The good news is that this provides you with a unique opportunity to save a HUGE amount of money. Think about it, if you can have a 5% -10% impact on this problem, you can save thousands of dollars each and every year. These tax relief strategies can put $10,000 or more in your pocket every year you do them. This in money you use to buy a new car, take a great vacation with your family, buy your spouse a great gift, YOU CAN DO ANYTHING YOU WANT WITH THE MONEY! It’s yours to spend or invest as you see fit.
What follows are 5 powerful strategies that can help you lower your taxes by 50% - 70%. Read on and start saving today.
Decades ago, the Supreme Court issued a judgment that will have a profound impact on your finances. They essentially said that “there are two tax systems in this country: one system for the educated and another tax system for the uneducated.”
The uneducated tax system is what we call the W-2 system. Its goes like this. You make money. The government swoops in and takes taxes (approximately 50%) and you must live on the rest. Here’s a diagram to better illustrate:
Money Earned
- Taxes Taken
Left to Spend
Despite all the hype created by the so called income tax preparation specialists, there are only a slim few tax deductions available to you in this system. Even if they do a great job, in this kind of tax system they can have very little impact.
The educated system goes like this: You earn money, you expense it off, and you pay taxes on the balance. It looks like this:
Money Earned
- Spend on Expenses
Pay Taxes on Difference
Simply knowing this one fact can have an ENOURMOUS impact on your tax bill and therefore on your financial wellbeing. Imagine the tax relief you get from paying your expenses before taxes are taken! If you don’t currently have your own business, it’s time to start one. You can increase your income AND put yourself into the educated tax system. The benefits are amazing. This single step could save you $5,000 or more.
Most accountants I interview say that they use around 25 tax deductions for their clients. Easy things such as their phone, fax, automobile, office supplies and the occasional meal or entertainment. This is definitely a step in the right direction because the uneducated system gives you only a handful.
However, we have identified more than 300 individual business deductions and numerous other strategies that can slash your taxes dramatically. These are deductions that the government makes available to you. Nothing shady, no gray areas red flags – these strategies are given to you and endorsed by Uncle Sam himself! Without fully using them, you are overpaying your taxes and ripping yourself off unnecessarily.
You see, the Supreme Court has also ruled that it is your constitutional right to arrange your financial affairs to minimize the amount of money you pay in taxes. You should not pay one dollar more than what you legally have to; but you probably are! Take the time to carefully review your personal check book, your personal credit cards and your personal cash receipts. Go line by line and identify those expenses that you can legally convert to business deductions. Shift them over to your business and reap the rewards! This tax relief strategy could save you over $15,000.
The Six Column Strategy is actually an extension of strategy #2. It starts by converting your ten largest expenses. The next step is to document those expenses in order to make your records audit-proof. By properly documenting your business expenses you shift the burden of proof back to the IRS. This can completely change the outcome of any questions that might arise.
Your documentation starts with a simple page or spreadsheet that you divide into 5 columns. You must answer 5 questions for each deduction you take. They are Who, What, When Where and How Much? Make each question a column heading and list each of your business deductions on a separate line. Along with your canceled checks, credit card statements and receipts, this forms the backbone of your documentation system.
Now, add a sixth column to your spreadsheet and label it “reimbursed expenses”. Go back through your personal expenses from this year and re-categorize those that can be deducted as business expenses. Pay special attention to health care, Travel and entertainment, equipment like computers, fax machines and business cell phones, supper money, clothing with a company logo, salaries for your kids and dependent care.
Total them up and write yourself a reimbursement check for the proper amount. (Many of our students report uncovering $2,500 - $7,500 using this process.
Now, here’s the super special; bonus: You can amend your tax returns up to 4 years back. Imagine that you discover $5,000 in savings. If you go back 4 years, that’s $20,000 in cash coming back to you – untaxed because it’s a reimbursement of a business expense. Not bad for a few hours work!
This could end up saving you $20,000 or more.
If you are doing business as an unincorporated business, you are paying an additional tax – the self-employment tax. This amounts to approximately 7% of the first $85, 000 of your income - about $5,600.
By setting yourself up in a proper business entity structure (Corporation or Limited Liability Company as an example) you can cut that down to less than $1,000. This strategy alone could save you about $4,000.
Tax Relief Strategy #5 – Up-Streaming Your Income
This is one of my favorite tax relief strategies because it is so simple, yet it has a HUGE impact on tax savings. It consists of shifting income from a high tax entity to a low tax entity. Here’s a simple example. Say you live in a state that has of maximum income tax rate of 9%. At year end, the income your generated in that state is subject to that tax. $100,000 in income = $9,000 in tax. Ouch!
Now, let’s say you could shift that income to another state that has a tax rate of 0% (Nevada and Wyoming for example). Now, instead of paying $9,000 in state taxes on that money, you now have to pay $0.
Just make absolutely sure you do it properly by having the proper documentation: including contracts, security agreements, invoices, etc. in place. This could save you $30,000 or more!
Let’s recap.
Estimated Savings from These Strategies
(These figures are for illustration purposes, your savings may be different):
Strategy 1: |
Start Your Own Business |
$ 5,000 |
Strategy 2: |
Convert Your Largest Expenses |
$ 15,000 |
Strategy 3: |
6th Column Strategy |
$ 20,000 |
Strategy 4: |
Self Employment Tax |
$ 4,000 |
Strategy 5: |
Upstreaming Income |
$ 30,000 |
The strategies outlined above are designed to give you an overview and working knowledge of just some of the tax strategies that are available to you. They are by no means the only strategies you can use to lower your taxes. If you would like to learn more about our programs and more advanced strategies, please call our office at (888) 695-2765 to schedule a free action strategy session. We can suggest products and services that will help you identify and implement additional tax saving and asset protection strategies.
To learn more about saving money on taxes by owning your own business, please see our Tax Relief page.