By Dave Horwedel, CEO of Torchlight Tax
A tax strategy is a plan of action or policy designed to achieve major tax savings.
A simple tax strategy is “Keep track of all business expenses so that I can deduct them.”
Good tax strategies save tax dollars and result in a more viable business and a better quality of life for the owner or owners.
Tax Avoidance vs. Tax Evasion
Tax Avoidance is legal. Strategies to avoid taxes are legal.
Tax evasion (reducing the amount of tax owed through false reporting, deceit, or concealment) is not. Some examples of tax evasion are:
- Failure to report all income on a tax return
- Claiming non-existent or personal expenses on a business return.
- Claiming deductions not supported by law.
- Shifting income to someone in a lower tax bracket. An example of this would be a distribution to a shareholder’s child.
Tax avoidance, on the other hand, is totally legal and follows the tax code. It requires discipline and skill. You must have the discipline to keep your records in order. This starts by keeping your business and personal bank accounts separate. Pay every business bill from your business account, and every personal bill from your personal account. Get your bookkeeping done throughout the year and know what your profit actually is.
Creating Legitimate Business Expenses
If you have more income than you need, which will result in paying more tax than you want to pay, you can create more legitimate business expenses. The lazy tax evasion route (failure to report income) is easy for the IRS to check. Moreover, the cover-up requires false books and continually working to keep your lies straight. Instead, spend money in your business that will expand it long-term and deduct the legitimate expenses:
Example: Spend $20,000 on machinery that increases your ability to produce and decreases your taxable income by $20,000.
Example: Spend $10,000 on a marketing campaign
Example: Spend $10,000 correcting your legal set-up so you have LLCs shielding your business and business assets from lawsuits.
You can even put these expenses on a credit card and deduct them as business costs.
Invest in what truly benefits your business. Spending $40,000 to save $10,000 can be a good idea. But if the $40,000 does not give you anything back, you just lost $30,000.
Vehicle expense is a common tax deduction. Keep track of your business and personal miles. You can use a logbook or apps that track this for you.
If you WANT to drive a nice big new car every couple of years, OK. You can buy one and get a big depreciation deduction. However, if you use depreciation in the first year, you can never take the mileage deduction for that vehicle. If you plan on keeping it for ten years, taking that big first-year deduction could be expensive.
Car dealerships will, of course, tout this big depreciation deduction. You do not need a new vehicle to deduct your mileage!
Other Powerful Tax Strategies
Cost segregation and accelerated depreciation are great tax avoidance strategies. See my video Introduction to Cost Segregation.
1031 exchanges are a powerful tool for deferring taxes while growing your real estate portfolio. To learn more, watch my video What is a 1031 Exchange?
Renting out your home to your business for events can lower your income substantially. Having 14 events at your home in a year (not one more than 14) could reduce your taxable income by $ 40,000 a year in some areas. For more details, check out my video Save Thousands of Tax Dollars Renting Your Home to Your Business
There are many tax-saving strategies detailed on my website and YouTube channel. Often, these involve setting up a structure of entities, such as LLCs, corporations and trusts, designed to minimise taxes and protect your assets. You can check out these strategies in my video playlist titled Asset Protection with Torchlight Tax.
Our Mission
Our mission at Torchlight Tax and Financial Solutions is:
- To save you tax dollars without cheating or putting you at risk.
- To take care of your bookkeeping and accounting so you can focus on expanding your business
- To advise you on tax and asset protection strategies.
- To make accounting and the tax filing process as pleasant as possible.
Contact us at 877-758-7797 or email info@TorchlightTax.com for a free consultation on tax savings and asset protection strategies.
Disclaimer: This content is intended solely for general informational purposes and does not constitute professional advice in areas such as accounting, tax, finance, investment, or law. Neither the author nor the distributor accepts any responsibility for actions taken based on this information. The content does not provide a comprehensive overview of any subject. Always consult a qualified professional before making decisions related to your business, finances, or legal matters.
