Are You Shoveling Buckets of Money to the IRS?

Let’s talk about how you can save a ton in taxes, if you are running a successful service business. Now, by service business, we’re talking about anything, any business that does not produce a thing. So, if your thinking about a consultant, lawyer, dentist, doctor, personal trainer or accountant. Those are all considered qualified service businesses by the IRS. And those types of businesses have special tax considerations.

Under the new tax law, there is a qualified business income deduction that is now in effect really for any business. But the challenge for service businesses is that once you start making a certain amount of money, that deduction starts to get phased out. That is where you’ll be losing a lot of money and sending a lot to the IRS that you really don’t need to, if we can look at some proper planning for your business. Specifically for this rule, what happens is once your combined income as a married couple starts to get over about $320,000, this qualified business income deduction starts to phase out. And that’s a big deal. What happens is that, from around 320,000 up to about 420,000, that deductions gets phased out and then it’s completely gone. Which is up around 420,000-421,000. At least as of 2019. Those numbers will continue to rise with inflation. For right now, that’s the range we’re looking at, around 320 to 420 of income. What happens is the difference between making $420,000 of income on your tax return and $320,000 of income on your tax return. Then, then that difference as far as of how much tax you’re going to pay, between federal and state, usually winds up around $50,000. And that’s going to depend on what state you’re in. But if you look at the $100,000 of income that you’ve made, about $50,000 of it will go to either the IRS and/or the state. That’s a pretty big chunk of change to be giving up based on your hard earned income.

So, how can we get that down, how can we get it to that $320,000 threshold or below. There are two main things that we can do. One, is that we can intentionally make an investment in the business. So, if you need a certain piece of equipment, or now’s the time to hire somebody. Any investment you can think that would make a significant difference in your business. Now would be a good time to do so, to help bring your income down. Also, you could use a retirement plan, and this is really the number one thing that we see a lot of small business owners use. Is a retirement plan where they can put a ton of money into a 401K in a proper sharing for themselves and get their tax write-off. So, it’s money that stays in your pocket. It might be a different pocket, but it’s money that stays in your pocket, and you get the tax write-off. Now to bring your income down below the threshold, so you get the qualified business income deduction. Now most commonly, when we’re trying to get from around $420,000 down to around $320,000, it’s going to be some combination of the retirement plan and making an investment in the business. And once you point out the difference in taxes paid, think about it, if you’re gonna spend $100,000, make a $100,000, then you’ll spend 50,000 in taxes. It’s certainly worth it to go ahead an make the investment in the business or in your own retirement account instead. And save the tax dollars. Effectively half of what you’re putting into. Either the investment, or into the business, or your retirement plan, is going to be a tax savings. Paid by the government for now. You’ll be taxed later when you take out the money in retirement. But still, that’s a huge chunk of change to be putting back in your pocket and investing back in your business.

So, those are the two main ways to really get your income down below the threshold, and save a ton on taxes. Just by proper planning year after year. Not only planning for this year, but looking out for many years into the future. You have any questions about qualified business income deduction or those thresholds we talked about, and how it applies to your business, give me a call or shoot me an email. I’d be happy to help.

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