For all you small S corp owners out there, does anyone have any tax minimization tips? The biggest deduction my accountant has been able to offer is the QBI (20% of profits are deductible from my W2). Have others been able to use R+D deductions? Maybe folks have a real estate strategy that works?
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Small firm tax tips 3
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Here are a few of my strategies:
- I have all my business mail sent to a PO box, which is conveniently located near a lot of stores/restaurants my family frequents. Every time we head that direction, I check mail, and can deduct the mileage for the trip. I am always looking for additional ways to turn a personal drive into deductible mileage, which is easier with a home office.
- I have my wife and my dad on my board. I schedule quarterly board meetings (AKA family visits), alternating between my home and my parent's home (parents are a state away). For meetings in my home, I personally charge the S-corp rent to rent out a portion of my home for the board meeting as well as provide logging for my board member. I contacted a local hotel to find the price they charge for an equivalent meeting space for the fair market value. Under the Augusta Rule, this rent is tax free income to me personally and a business expense to the company.
- For board meetings at my parents home, the travel and meals are deductible for me and my wife.
- Since my wife is also on my board, we try to have monthly check-in meetings (AKA date night out). I always jot down some notes, have an agenda, and schedule it in my calendar to make it legit. Since she is on my board, the meal is fully deductible.
- I use a points rewards card for business and transfer those to my personal card and redeem personally. Because they are points, the IRS does not view them as income or reduction in the expense (as is the case with cash back). Ditch the cashback credit card for your business.
- HSA, health insurance, solo 401k, etc. are also methods I employ. Many of these benefits also count as part of your reasonable salary for the S-corp.
I am always looking for additional strategies. I am curious what the R+D deductions looks like in practice?
Something my accountant and I are exploring is using real estate depreciation to deduct against my income under the Real Estate Professional rules but viewing most of my engineering work as involved in real estate development. We are still hashing that one out, and waiting for a good year to employ if we do.
- I have all my business mail sent to a PO box, which is conveniently located near a lot of stores/restaurants my family frequents. Every time we head that direction, I check mail, and can deduct the mileage for the trip. I am always looking for additional ways to turn a personal drive into deductible mileage, which is easier with a home office.
- I have my wife and my dad on my board. I schedule quarterly board meetings (AKA family visits), alternating between my home and my parent's home (parents are a state away). For meetings in my home, I personally charge the S-corp rent to rent out a portion of my home for the board meeting as well as provide logging for my board member. I contacted a local hotel to find the price they charge for an equivalent meeting space for the fair market value. Under the Augusta Rule, this rent is tax free income to me personally and a business expense to the company.
- For board meetings at my parents home, the travel and meals are deductible for me and my wife.
- Since my wife is also on my board, we try to have monthly check-in meetings (AKA date night out). I always jot down some notes, have an agenda, and schedule it in my calendar to make it legit. Since she is on my board, the meal is fully deductible.
- I use a points rewards card for business and transfer those to my personal card and redeem personally. Because they are points, the IRS does not view them as income or reduction in the expense (as is the case with cash back). Ditch the cashback credit card for your business.
- HSA, health insurance, solo 401k, etc. are also methods I employ. Many of these benefits also count as part of your reasonable salary for the S-corp.
I am always looking for additional strategies. I am curious what the R+D deductions looks like in practice?
Something my accountant and I are exploring is using real estate depreciation to deduct against my income under the Real Estate Professional rules but viewing most of my engineering work as involved in real estate development. We are still hashing that one out, and waiting for a good year to employ if we do.
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Thanks LOTE. Interesting about how you claim your quarterly board meetings.
The other big deductions I didn't mention are SEP IRA and PTET (which allows me to deduct state and local taxes). A big one used to be the Domestic Production Activities Deduction which was 9% of S corp income but Trump got rid of that in 2017.
The other big deductions I didn't mention are SEP IRA and PTET (which allows me to deduct state and local taxes). A big one used to be the Domestic Production Activities Deduction which was 9% of S corp income but Trump got rid of that in 2017.
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@XR250,
Haha, it does sound that way. But these are legitimate expenses, and I don't go overboard. When we have a meeting, there is always an agenda, calendar invite, and meeting minutes. My dad is a retired business owner and I value including him as an advisor in this official way. And I include my wife on all my business decisions and, even though she is not active in the business, a board position is a great way to recognize that.
The rental documents are attached to my tax return to preemptively answer any questions the IRS may have for the Augusta Rule. If you have any questions on these strategies, I am happy to send you the IRS publication on it.
Haha, it does sound that way. But these are legitimate expenses, and I don't go overboard. When we have a meeting, there is always an agenda, calendar invite, and meeting minutes. My dad is a retired business owner and I value including him as an advisor in this official way. And I include my wife on all my business decisions and, even though she is not active in the business, a board position is a great way to recognize that.
The rental documents are attached to my tax return to preemptively answer any questions the IRS may have for the Augusta Rule. If you have any questions on these strategies, I am happy to send you the IRS publication on it.
Capturing rent from your business is a valuable way to build equity whether that is in a house or a commercial property. My financial planner mentioned that many owners when they sell their business will profit more from the real estate than the actual business. You just need to be avoid being penny wise and pound foolish.
I can appreciate LOTE's business savvy.
I can appreciate LOTE's business savvy.
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@GC_Hopi: you mean that we engineering consultants should own our offices? The received wisdom for consulting engineers is that your S corp should not have any assets for liability reasons, but I guess you could hold the commercial property on the personal side. How would all this work? I have considered buying an "office condo" for this reason and have not yet figured out the logic. I think there is a significant tax benefit on the depreciation of the rental property (~1/30th of the value of the property for 30 yrs). Also income from investments is not subject to FICA.
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Not everyone should own their offices. You need deep pockets to hold commercial property but deep is relative to your local market conditions.
You are able to own and lease the space to your business. The key is to keep everything separate.
[ul]
[li]Create an entity which owns the commercial property. In this case call it Smith Street, Inc.[/li]
[li]Create the business entity. In this case call it John's Drafting Shop, LLC[/li]
[li]Create two separate checking/savings accounts for each entity.[/li]
[li]Draft a lease between the two entities.[/li]
[li]Monthly rent checks are written from John's Drafting Shop, LLC to Smith Street, Inc each month.[/li]
[li]Each entity files taxes separately.[/li]
[/ul]
A few suggestions:
[ul]
[li]Keep the rent on the higher side. You pay less tax on passive income (rent).[/li]
[li]Keeping the rent higher allows you to control the market. If you ever choose to close the business and lease the property to a Tenant there is a track record of what $/psft rent was.[/li]
[li]Take owner withdraws from Smith Street, Inc for primary income instead of cutting checks from John's Drafting Shop, LLC.[/li]
[li]Always - always - treat the two entities separately.[/li]
[/ul]
Owner occupied businesses are common. Just follow the law.
You are able to own and lease the space to your business. The key is to keep everything separate.
[ul]
[li]Create an entity which owns the commercial property. In this case call it Smith Street, Inc.[/li]
[li]Create the business entity. In this case call it John's Drafting Shop, LLC[/li]
[li]Create two separate checking/savings accounts for each entity.[/li]
[li]Draft a lease between the two entities.[/li]
[li]Monthly rent checks are written from John's Drafting Shop, LLC to Smith Street, Inc each month.[/li]
[li]Each entity files taxes separately.[/li]
[/ul]
A few suggestions:
[ul]
[li]Keep the rent on the higher side. You pay less tax on passive income (rent).[/li]
[li]Keeping the rent higher allows you to control the market. If you ever choose to close the business and lease the property to a Tenant there is a track record of what $/psft rent was.[/li]
[li]Take owner withdraws from Smith Street, Inc for primary income instead of cutting checks from John's Drafting Shop, LLC.[/li]
[li]Always - always - treat the two entities separately.[/li]
[/ul]
Owner occupied businesses are common. Just follow the law.
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@GC_Hopi: thanks for the more detailed explanation. I guess holding the office in another LLC would provide some asset protection for we PE's. It's a bit of admin overhead but doable. What is the tax advantage of paying yourself high rent? Is it just avoiding FICA? Rental income is generally taxable like regular income. I feel like that would be relatively small (especially since I have to pay myself W2 salary to the FICA cap anyway). The depreciation deduction and general capital appreciation side of things would be much larger but that would apply to any real estate investment. I am also considering buying a medical space and renting to a doctor. If I own my office there is also a flexibility factor - if I add staff its tough to create the extra space. Also in my area its much easier to buy a doctors office than an office condo.
The tax advantages are going to be specific to your situation so check with your CPA. Try googling "commercial rental income tax advantages" there are articles out there that give lists. The cost of entry is much lower with the residential houses that are converted to commercial. I assume that is what you are referring to by doctors office.
XR250, I was trying to make it relevant and simplify the tax lingo a bit. Yes, we do coordinate our board meetings to when we are planning visits anyway. There is nothing wrong with this. As long as a portion of the trip is devoted to business, the travel to and from is a tax deductible business expense, regardless of the length of trip:
From IRS Publication 463: "If your trip was primarily for business and, while at your business destination, you extended your stay for a vacation, made a personal side trip, or had other personal activities, you can deduct only your business-related travel expenses. These expenses include the travel costs of getting to and from your business destination and any business-related expenses at your business destination."
We conduct formal board meetings on these trips, and it is a great opportunity to talk through business goals. Another way to look at this, if I could find advisors that weren't related to me that I could trust and provide as valuable advise as my dad and my wife, and I all I had to compensate them was host the board meetings and provide them accommodations (or equivalent costs) to get their invaluable advise, any business owner would jump on that in a heart beat! I would likely be paying 10X this for the same attention and advise from a non-relative. The fact that they are related to me is irrelevant when it comes to determining whether this can be considered an ordinary and necessary business expense.
From IRS Publication 463: "If your trip was primarily for business and, while at your business destination, you extended your stay for a vacation, made a personal side trip, or had other personal activities, you can deduct only your business-related travel expenses. These expenses include the travel costs of getting to and from your business destination and any business-related expenses at your business destination."
We conduct formal board meetings on these trips, and it is a great opportunity to talk through business goals. Another way to look at this, if I could find advisors that weren't related to me that I could trust and provide as valuable advise as my dad and my wife, and I all I had to compensate them was host the board meetings and provide them accommodations (or equivalent costs) to get their invaluable advise, any business owner would jump on that in a heart beat! I would likely be paying 10X this for the same attention and advise from a non-relative. The fact that they are related to me is irrelevant when it comes to determining whether this can be considered an ordinary and necessary business expense.
EZBuilding
Structural
LOTE - thank you for being an open book in sharing these practices.
The US tax system seems to be chock full of loopholes and hoops to jump through - many of which are tailored towards high net-worth individuals or large corporations. Those that are able to navigate these loopholes at every level put themselves and their families in opportunities to benefit. This is likely not the most fair way to levy tax, but it is the system we all play by whether we like to or not. I think XR's categorization of it as tax fraud or illegitimate is unfair. Don't hate the player hate the game.
The US tax system seems to be chock full of loopholes and hoops to jump through - many of which are tailored towards high net-worth individuals or large corporations. Those that are able to navigate these loopholes at every level put themselves and their families in opportunities to benefit. This is likely not the most fair way to levy tax, but it is the system we all play by whether we like to or not. I think XR's categorization of it as tax fraud or illegitimate is unfair. Don't hate the player hate the game.
This is an interesting discussion, thank you LOTE for sharing your practice. The only part I might question from your last post is this:
. I'm curious what your approach is to the discussion of these visits being primarily for business? I'm not familiar enough with this tax provision to understand how best to utilize it.
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I agree that Lotes deduction for the cost of the board meeting is legit. Board meetings are a requirement of corporate registration, and it is reasonable that there is some degree of cost associated with that. It's also reasonable and common that the board is unpaid - even large corporations have boards which have billionaire members who get paid $100k to be on a board. They do the work basically unpaid because they have an interest of some sort.
ChorasDen, if you have an agenda and calendar invite sent out to the attendees, the attendees are on your board and you have a resolution in your corporate documents that added them to your board, you document ahead of time when and where you are going to meet, and you take meeting minutes, it would be hard for the IRS to argue that the purpose of the trip was not for business. And we are meeting in a home, not a resort or a tourist destination, so it is not extravagant. Here is an article and podcast on the topic:
On the other hand, if I go to Disney World, and while I'm there I text a buddy that lives there to grab lunch, and we happen to talk about the business and he happens to work for a business that could be a potential client, it would not be possible for me to say with a straight face to an IRS auditor that the trip was for business. Nor was it ordinary and necessary for my business. I would not try to write off any part of that trip or lunch.
On the other hand, if I go to Disney World, and while I'm there I text a buddy that lives there to grab lunch, and we happen to talk about the business and he happens to work for a business that could be a potential client, it would not be possible for me to say with a straight face to an IRS auditor that the trip was for business. Nor was it ordinary and necessary for my business. I would not try to write off any part of that trip or lunch.
EZBuilding said:
That's fair. FWIW, I do my fair share of pushing the limits of my allowable deductions.
Sure maybe it is technically legal, but at least Lote should admit that he created his "board" so he can write off travel for his family LOL.
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