There are many, many advantages to owning a small business—unlimited upside, work your own hours, better free time, and tax deductions, just to name a few. Many professionals choose to have a side hustle in addition to their normal 9-5 simply for the tax and retirement strategies. I recently helped a client realize that she could save thousands of dollars in taxes and deferred taxes by starting her own LLC. She decided to implement this before year’s end so she could bank those advantages for this year. Here are 5 advantages of owning your own business and how to take advantage of them.
- Tax deductions. All of the tools, supplies, materials, insurance, and other business costs that you incur are tax-deductible meaning they decrease your taxable income dollar-for-dollar. You can also depreciate your vehicle or write off business mileage. You can even claim a loss for your business for the year and offset your regular job income as long as it is a legitimate business.
- Retirement savings. You can start a retirement plan for your business and use the income from your business to fund it. You can open a SIMPLE IRA and contribute up to $13,500 in 2021 and $14,000 in 2022. All of these contributions are tax-deferred so they can also lower your taxable income and help you build your wealth for the future. The IRS states that you must have earned income (not rental or investment income) in order to contribute to an IRA. If you have income such as alimony or rental income, but you aren’t working, you are not allowed to contribute to an IRA. Starting a side hustle would allow you to have earned income and contribute to a traditional or Roth IRA in the amount of $6,000/year, in addition to a SIMPLE IRA.
- Greater income potential. When you are working for someone else you will always make a fixed income, but when you own your own business, the sky is the limit. Yes, it has its own inherent risks, but there is greater earning potential.
- Buying and then leasing back your equipment to yourself. The classic example of this is the doctor who buys a building and then rents it from herself for the business. She is able to secure a good tenant (herself), depreciate the building for the tax benefits, and write off the rental costs from her business.
- Special small business grants. The government is keen on helping out small business. They will give you a $500 tax credit for starting a retirement plan for your employees. There are also local and state grants and incentive programs. Check with your localities to see how you could benefit.
This is not tax advice specific to your situation. Check with your tax advisor or accountant before making any changes. I specialize in helping set up IRAs and SIMPLE IRAs for business owners, retirees, and pre-retirees. Contact me today for help if you’d like more information.
