SALT Deductions
The purpose of the SALT deduction is to avoid double taxation by excluding income taken in taxes for state and local government services. It allows you to deduct up to $10,000 of state and local taxes from your federal tax return. However, for pass-through entities (PTEs) like partnerships, LLCs, and S corporations, some states have implemented workarounds allowing these businesses to pay state taxes at the entity level. This strategy can maximize your tax benefits by exceeding the $10,000 limit for personal SALT deductions. Be sure to check if your state offers this option and how it aligns with your business structure to potentially lower your tax burden.
Paying Family Members through your Business
Hiring family members, particularly your children, can be a savvy tax strategy. When you employ your kids, your business can deduct their wages, which reduces your taxable income. This income can be tax-free for the child up to the standard deduction amount (currently $14,600 for a single taxpayer). Additionally, wages paid to children under 18 are exempt from Social Security and Medicare taxes if your business is a sole proprietorship, single member LLC, or partnership owned by both parents. Wages paid to children under 21 are exempt from federal unemployment taxes for the same business entities.
You should also consider setting up Roth IRAs for them with the earned income, a tactic that will provide a significant head start on retirement savings. However, it’s essential to ensure that the work is legitimate and the wages are reasonable and commensurate in order to comply with IRS regulations.
The Augusta Rule
The Augusta Rule, named after the famous Masters Tournament, one of the four major men’s professional golfing championships, allows you to rent out your home to your business for up to 14 days a year without paying tax on the rental income. Your business can deduct the rental expense, provided it is at fair market rate. This strategy applies if your business is taxed as a partnership, S corporation, or C corporation. To take advantage of the Augusta Rule, it’s crucial to keep thorough records, including rental agreements and market rate documentation, to substantiate the rental transaction. This rule can be especially beneficial for businesses that occasionally host meetings or events at the owner’s home, providing a legitimate way to lower taxable income while maintaining IRS compliance.
To maximize the benefits, it’s essential to stay informed about the latest tax regulations and work with a knowledgeable tax professional who can provide personalized advice tailored to your business needs. Embracing these tax-saving techniques not only enhances your bottom line but also positions your business for sustained success and growth.
Sources:
https://accuservepayroll.com/hiring-family-members/
https://www.bankrate.com/investing/what-is-the-augusta-rule/#a-supply-and-demand-imbalance
https://www.landmarkcpas.com/tax-dos-and-donts-for-hiring-your-child/
Disclaimer: This blog post is for educational and informational purposes only and is not meant as individualized financial or legal advice. We recommend you consult with a financial advisor or attorney for personalized guidance based on your specific financial circumstances and local laws before taking action.