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If you own and operate a small business, the IRS tax laws offer you a variety of ways to receive tax relief and lessen your tax burden.
Children. You have probably seen those television commercials involving children promoting their parent's business, right? Have you ever wondered why someone would do that? There is a tax benefit, that is why. You can easily lower your business's taxable income (thereby providing a tax relief) by putting your children on your payroll. You can do this tax-free for up to $4,850. In order to do this, however, your children must be employed doing legitimate work for you.
Parents. The same principal applies by hiring your parents. The work you hire them to do must be legitimate and productive to your business operations.
You. Pay yourself a salary instead of a draw. Your salary would be in the form of either a guaranteed payment or wage figure. In other words, put yourself on your company payroll. By doing this, you will decrease your taxable income. By decreasing your taxable income (as mentioned above), you will be giving yourself some tax relief. In addition to receiving tax relief, you will be able to put yourself into your company retirement plan. That will help you receive more tax relief, also.
One important benefit of putting yourself of your company's payroll is the fact that it will generate earned income for you. You need to have earned income in order to qualify to make contributions to any retirement plan (or other fringe benefit programs) your company may have.
Retirement plans. By implementing a company retirement plan, you will receive tax relief by lowering your taxable income. In fact, company retirement plans are the number one fringe benefit available to employees. Therefore, they create the largest tax relief for the employer.
Expensing. Another great way to receive tax relief is to expense smaller value asset items instead of capitalizing them. Instead of having the item show up on your books as an asset, it will show up as an expense. This can be accomplished by developing an expense policy that states items that are purchased for under $100 are to be treated as an expense and not an asset on your books. In simplified terms, assets increase taxable income while deductions reduce taxable income. By reducing taxable income, obviously, tax relief is imminent.
Personal assets. You can receive tax relief by putting some of your personal assets into business use. For instance, use your car for business purposes. You can deduct depreciation, mileage, repairs and other related expenses during your business operations. Be sure to document everything.
Home Office. Operating a home office is a beneficial way to receive tax relief in a wide variety of ways. The IRS requires your home office to be: 1) your principal place of business for any trade or business; and 2) a place where you meet or deal with clients, customers, or patients. Your home office must also be used exclusively and regularly for business purposes.
Most expenses related to a home business are tax deductible, with some limitations. There are many IRS rules and regulations to follow regarding operating a home business. It is important to know these tax laws since home office operations are known as an IRS ‘audit red flag' area. Many taxpayers who think they qualify for a home office deduction, actually do not.
Schedule C filers (self employed, for instance) will use IRS Form 8829 (Expenses for Business Use of Your Home) to calculate the deduction. Employees with unreimbursed job-related expenses will use IRS Form 2106 (Employee Business Expenses).
This is a simplified description of all that is involved in claiming a home office deduction. For more information, read IRS Publication 587.
This article comes as close as I get in term of paying my self a salary. As a self proprietor, I can not figure out what form I should use to put salary I paid myself. Schedule C line#26 says do not include wages paid to yourself. It seems that as SE, i am not allowed to pay myself. Help!