Ways to Save on business taxes
Health Insurance Premiums
Business owners can generally deduct the full cost of health insurance premiums for themselves, their spouse, and their dependents as long as the health insurance is not provided through another employer. For instance, if the insurance is through the spouse’s employer, or if it’s through the Federal government provided to a Federal retiree, the premiums would not be deductible. Surprisingly, medicare premiums are fully deductible.
For corporations, health insurance must be a non-discriminatory group plan and the premiums must be paid by the corporation. Further, for S corp shareholders, the premiums must be reported a certain way on the W-2.
Small Business Health Care Tax Credit
Small business owners may be eligible for a credit up to 50% of premiums paid by the company. To be eligible for the credit, insurance must have been purchased through a Small Business Health Options Program Marketplace and the average wages (not counting the owners’ wages) must not exceed $52K.
Cafeteria plans allow employees to pay their portion of health insurance pre-tax. For instance, if an employee pays $200 per month to participate in the employer’s health insurance, the $200 would not be subject to income tax or FICA (Social Security and Medicare) for either the employee or the employer. A cafeteria plan is required to be documented. Often the insurance company can provide a basic plan at no charge.
The deduction for vehicles is always based on how the vehicle is used. Vehicles that are used 100% for business get the full deduction. Vehicles that are used partly for business and partly for personal use, get a partial deduction. Usually the biggest portion of personal use is driving to and from work, i.e. commuting. The IRS requires a mileage log to substantiate business use. (It’s very common for taxpayers to overstate their business mileage, and as a result, it’s one of the very first things the IRS checks on audit.)
For vehicles that are owned by the business, there are two options: the standard mileage rate or actual expenses. Actual expenses include gas, maintenance, insurance, and depreciation.
The decision to use the standard mileage rate or the actual expenses method is only made the first year. After the first year, you have to continue using the same method. For vehicles owned by the business, any personal use must be captured on the employees’ W-2s. The IRS provides a method to calculate the personal use based on the value of the vehicle and the business and personal mileage.
For vehicles owned personally, the standard mileage rate is the only option.
Contributing to retirement is one of the best ways to shelter money from taxes. There are a lot of options to consider depending on how much you want to shelter and how many employees you want to cover (if any). We can help you decide between IRAs, SEPs and 401-Ks.
There’s a credit of up to $500 per year to offset the administrative costs of establishing a new retirement plan for the first three years.
Employers in the food and beverage industry may be eligible for a credit on the social security and Medicare taxes paid on employees’ tip income. (The credit is not available for tip income used to meet the federal minimum wage requirement.)