11 Tax Strategies for Business Owners That Ought Not Be Ignored

My name is Brian Scribonia and on this episode of the Common Sense Financial Podcast, through a professional cost segregation study, you may be able to identify significant assets that are eligible for shorter depreciation schedules. Instead of slowly deducting these costs over four decades, you could potentially deduct more in the first year alone. And again, this upfront tax savings can significantly improve cash flow, freeing up capital for reinvestment, expansion, and maybe even paying down debt Foreign.

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There's a difference between what's real and what's true. You're listening to the Common Sense Financial Podcast. I'm your host Brian Scribonian. Thanks for tuning in and let's get into today's topic. If you're a business owner, you know the challenge of the time spent in the business, the risks you take on to run the business while dealing with people and many of the inherent problems that come with that. Managing staff and balancing family to make a profit. And when it all said and done, the IRS is there with their handout. Honestly, after a good year, taxes can sometimes feel like a punch in the gut. But here's here's the thing. It doesn't have to be as bad as it may be. I often tell all my entrepreneurial clients that we need to behave like the big guys and not follow the basic status quo ideas that is said to be tax planning. When you look at wealthy individuals, what I have found is that they don't necessarily work any harder for their wealth, but they approach their wealth and their taxes differently. They use what I would consider smart and well thought out strategies. And these strategies aren't just reserved for the ultra wealthy, it's reserved for the informed. You have heard me say this before, but it's worth repeating. By thinking differently, we can work to expand capabilities and improve circumstances. Here's the thing. When I work with clients, I often approach their situation from a cash flow and tax mitigation standpoint because this is where the most significant impact is made. Many people wrongly believe that if they lower their investment fees or find a better portfolio of stocks, they can be in a better place. If you compare that to to what can be accomplished with cash flow and tax planning, there is no comparison. Our clients often learn how to create passive income streams that, by utilizing tax efficient strategies, can help reduce their taxable income. And you don't need to be a billionaire to do this. You just need the right roadmap. So today I'm going to walk through 11 powerful strategies that are designed to help you keep more of what you earned. Of course, this isn't an exhaustive list, but I did narrow it down to 11 that I wanted to share with you today. And these are things that you most likely have not heard of before. These are all practical ideas that can make a real difference for your bottom line. Now let me be clear. I'm not a CPA and I'm not a tax preparer. I'm a financial advisor. Wealth advisor, Chartered Financial Consultant, Certified Private Wealth Advisor. So that's my role. We work very closely with CPAs and tax attorneys to make sure the advice you get is is aligned with your overall plan. But the goal today is simple. I want to show you how the tax code can be used as a tool to build wealth. Instead of just feeling like it's working against you all the time. Let's start by shifting the way you think about taxes. Because too many business owners treat taxes like a once a year nuisance. They write a check and they move on. But taxes are often your single big expense. Bigger than rent, bigger than payroll. And the gap between being reactive versus proactive can mean tens of thousands, maybe even hundreds of thousands, thousands of dollars in your pocket over time. Taxes aren't just a line item on your P and L. They're a drain on your business if you don't plan for them. The tax code, though, is full of opportunities. But they aren't always so obvious. You have to know where to look and you have to take action to claim them. The truth is, the tax code is written to encourage certain behaviors. Investing, growing, innovating, creating jobs. It's not just for the big corporations. It's for small business. Whether you're running a small shop or a large company, there are incentives available to so today, like I said, I'm going to share 11 strategies that hopefully can help you save on some taxes. Some of these you may not have heard of before. But remember, this isn't a one size fits all situation. And before you act, always sit down with your CPA or tax attorney and make sure it fits your situation okay, so let's jump in. The first thing is something called a research and development tax credit or R and D tax credit. One of the most overlooked tax strategies for small business owners is the research and development tax credit. Most people hear R and D and immediately think of large pharmaceutical companies or Silicon Valley tech firms. But the reality is the credit is much broader and far more accessible than many realize. If your business is creating new products, improving existing processes, developing prototypes, and even enhancing software to better serve customers, you may or could qualify. So, for instance, imagine you own a bakery and you're experimenting with a new gluten free recipe. The wages you pay employees for the testing process, the cost of experimental ingredients, and even some certain equipment expenses could all be eligible for this R and D credit. Under current rules, businesses can offset qualifying costs and reduce their federal tax liability. Changes in 2024 to Form 6765 aim to make the credit more accessible by simplifying documentation requirements, and these adjustments allow small businesses to better substantiate their claims and reduce audit risk. But the key takeaway here is this. If you don't have to wear a lab coat to qualify for the R and D credit, any company investing in innovation, whether manufacturer, service provider, or even a small local business, should at least explore the opportunity. And always, always, always consult with your CPA to assess what activities in your business might qualify and how to properly document them for maximum benefit. The second one is the Augusta Rule. This is renting your home to your business. Another powerful yet often underutilized tax strategy for business owners is the Augusta Rule. Formerly known as Section 28A of the Internal Revenue Code. This provision allows homeowners to rent their primary residence to their business for up to 14 days per year without having to report the rental income on their personal tax return. It's named after homeowners in Augusta, Georgia, who would rent their homes tax free during the Masters golf tournament. And the rule offers significant benefits for businesses, business owners. For example, if you operate a consulting firm and occasionally host strategic meetings or team retreats or client events at your home, your business could pay you a fair market rental for the use of your home. And if the fair rental value is, let's say, 500 bucks a day and you rent your home to your business for 14 days. That's $7,000 of tax free income added to your personal finances. And your business can fully deduct the rental expense as an ordinary and necessary business cost. But to use this strategy correctly, it is critical to document everything. Have a formal rental agreement, generate an invoice for each event, and substantiate the rental rate with comparable local market data. Proper documentation for this and everything ensures compliance and shields you from IRS scrutiny. As always, consult your CPA before implementing the strategy to make sure the structure is appropriate for your business situation. Number three is the D Minimis Safe harbor for Tangible Property. While the name sounds complicated, it's simply a powerful tool for business owners because under IRS guidelines it allows you to immediately deduct the cost of tangible property purchases such as computers, office furniture or equipment, rather than having to depreciate them out over several years. For example, if you're a freelance graphic Designer and purchase five new monitors at $500 each, you could deduct the entire $2,500 in the year of purchase. But without this election, you would typically have to capitalize and depreciate those assets over five or seven year schedule. So accelerating the deduction provides an immediate cash flow benefit and simplifies your bookkeeping. So to use the D Minimis Safe harbor election properly, two requirements must be met. First, you must have a written accounting policy in place at the beginning of the year stating that you're expensed items under a certain dollar amount. Second, you must make the election annually by attaching a statement to your filed tax return. This strategy is particularly useful for businesses that frequently purchase low cost items throughout the year, and it's an easy way to boost deductions without complicated depreciation schedules. Just of course, be sure to talk with your CPA and make sure they're getting that set up correctly for you to remain compliant. Number four is the Qualified Business Income Deduction or qbi. I find that you know, a lot of small business owners do know about this, but there's a lot that don't and they don't take advantage of it, which is fascinating to me. But the qualified business Income created under section 199A of the Tax Cuts and Jobs act is a major opportunity for small business owners operating through a pass through entity like a S Corp. Or LLC partnership sole Proprietorship because it allows eligible business owners to deduct up to 20% of their qualified business income, thus reducing taxable income before calculating their final tax bill. Here's a simple example. If you operate a graphic design firm, let's stick with that and generate $100,000 in that business income, you could potentially deduct 20,000 DOL dollars, leaving only $80,000 subject to the income tax. And depending on your marginal tax bracket, this could mean thousands of dollars of savings. There are income thresholds to be aware of and I'm not going to get into those, but there's phase outs that begin and once above those limits, eligibility and deduction amounts can be restricted based on the type of business and wages paid or qualified property owned. And certain businesses such as like law firms, accounting consulting, or even financial services, they do face some stricter restrictions, but they still qualify with proper planning. So structuring wages, managing taxable income and maximizing deductible expenses are key strategies for your CPA to help you navigate. Because the QBI deduction is essentially a reward for business owners, but it does require some planning. Number five is the bonus depreciation for equipment. So this is another important strategy for business owners that have provisions that allow them to immediately deduct a significant percentage of the cost of qualifying property like machinery and vehicles and furniture, computer equipment the year it's placed into service, rather than spreading that deduction over years through traditional depreciation as part of the Tax Cuts and Job act, bonus depreciation can be used for both new and used qualifying assets. So that was a change from before. So for example, suppose you run a construction company and purchase a $50,000 excavator. Under current rules, you could immediately deduct a portion of this in the first year, while the remaining amount would be depreciated over the asset's useful life. So this front loading of deductions is the key part here. It can have a significant impact on cash flow, particularly for businesses investing heavily in growth. And bonus depreciation can also be combined with Section 179 expensing, which allows even more flexibility for immediately writing off equipment purchases. Though the two programs have different eligibility rules and limits, Section 179 deductions can allow for write offs into the millions of dollars if all the criteria are met. So qualifying property includes tangible personal property like mach office furniture, vehicles with some restrictions and off the shelf software, real property improvements like roofs, H VAC systems, fire protection systems, security systems, they all this stuff can surely qualify under certain conditions. And again, as I'm saying after every one of these points is that you need to be working with a CPA to ensure you're properly optimizing these deductions and proper bookkeeping and whether you truly qualify for them just to stay in compliance. These all work well if you work within the lanes of how they were intended to be used. Number six is intangible drilling costs or IDCs for oil and gas. Now, for investors or business owners involved in oil and gas exploration, intangible drilling costs or IDCs offer one of the most aggressive and immediate tax advantages available. Idcs cover all non salvageable expenses associated with drilling a well, such as labor, fuel, drilling fluids, site preparation and supplies. The key benefit is that up to 100% of these costs can be deducted in the year they are incurred, regardless of whether the well ultimately produces oil or gas. For instance, if you invest $100,000 in an oil drilling partnership and 70,000 of that investment is allocated to IDCS, you could potentially deduct the entire $70,000 in the first year, dramatically reducing your taxable income. Again, this front loaded deduction can make a major difference for investors seeking immediate tax offsets. Just keep that these investments like this are highly technical and they're not all created equal. There's a lot of variations of these, so active participation is key. Those materially involved in the operation, those are the folks that can claim the IDC deductions directly against their ordinary income. While passive investors may face limitations under passive activity rules, again, it just all depends on the structure and the mechanics of the offering. So again, it's essential to work closely with a cpa, a tax attorney, and in this case, with a financial advisor who's experienced in oil and gas taxation and how these offerings work to make sure they're properly structured and that your participation helps you maximize your deductions. Otherwise, you may find yourself in a structure where you aren't getting the tax benefit you thought you would. IDCs have long been a tool to encourage domestic energy development, offering a significant tax incentive to those willing to take on exploration risk. So if you're investing in the sector, overlooking IDC opportunities could mean missing out on substantial tax savings, not to mention the cash flow from the well production. Once that begins. Number seven is cost segregation for real estate. For commercial property owners, cost segregation, it's a highly effective tool to accelerate depreciation and create early tax savings. Instead of depreciating an entire building over the standard 39 year life for commercial real estate, a cost segregation study identifies and reclassifies specific building components such as H Vac systems, lighting, carpet, specialized plumbing, that type of stuff that could be depreciated over a 5, 7, or maybe a 15 year period. Through a professional cost segregation study, you may be able to identify significant assets that are eligible for shorter depreciation schedules. Instead of slowly deducting these costs over four decades, you could potentially deduct more in the first year alone. And again, this upfront tax savings can significantly improve cash flow, freeing up capital for reinvestment expansion and maybe even paying down debt. So cost segregation has become even more powerful when you combine it with that bonus depreciation rule, allowing identified assets to be fully expensed in the first year if they qualify. However, the IRS does require a detailed engineering based study to substantiate the reclassification of assets. This isn't just something you make up on the fly, and so it's essential to work with qualified professionals and coordinate closely with your CPA to ensure compliance. Cost segregation isn't just a tax deferral tactic. It's a way to unlock significant financial flexibility early in property ownership. Number eight is Market value adjustments on properties specifically for Roth conversions. One lesser known but highly effective of Roth conversion strategy involves leveraging market value adjustments during the early phases of a real estate investment held inside of a traditional ira. Some benefits can apply outside of it, but specifically in a traditional IRA when you're looking at doing conversions, because taxes on a Roth conversion are based on the asset's fair market value at the time of the conversion, not its future value. So during the construction phase of a project, the fair market value of a property is typically lower than its projected value at completion. So this creates a strategic opportunity. By converting the property while it's still under development, investors can pay taxes on a reduced valuation later as the project is completed and appreciates in value. All future growth, of course, occurs inside the Roth ira, potentially entirely tax free, rather than using a complex and administratively burdensome self directed IRA structure, which we often find people get themselves into. Many investors like to participate in real estate projects through syndicated private placements because these investments simplify ownership and the valuation reporting is done for you while still offering exposure to the real estate opportunities. Because it's critical to obtain an independent certified valuation at the time of conversion as required by the IRS regulations to substantiate the fair market value. And of course, as you can imagine, failure to properly document the value can lead to audit issues or penalties. That's why using a financial advisor who can work with you to find the right private placements to participate in can reduce the heavy lifting of appraisals and compliance and Given the complexity of asset valuation rules and Roth IRA regulations, working with an experienced tax advisor, legal counsel and again financial advisor really is essential to correctly structuring and executing the strategy. Number nine is Build Banking. I threw this one in here because it's creating tax free access to cash and strategic business protection. Another advanced strategy for business owners is leveraging Build Banking. It's our trademark term for a system that uses specially designed high cash value whole life insurance policies to create a private banking platform within your business. This concept allows a business owner to accumulate cash tax deferred and access it tax free through policy loans following the guidelines under the IRC section 7702. There are several key advantages here. First, it provides tax free access to capital, offering liquidity for opportunities to expand or purchase equipment or whatever you need to do operating expenses or investments without interrupting the policy's compounding growth. That's really the key is you have uninterrupted compounding growth. Second, it delivers potentially a key person insurance protection when it's needed, meaning the business is safeguarded in the event of the death of an owner or critical executive. Third, it can provide a permanent death benefit. So this creates a liquidity source for estate planning, succession, funding of maybe a buy sell agreement or for personal use to support family wealth transfer. Beyond these uses, the Build Banking strategy offers asset protection in certain states with certain limitations. Consistent guaranteed growth that's not tied to market volatility. It's based on the claims paying ability of the insurance company and the ability to strategically replace traditional financing structures that burden cash flow. If you have time to build the banking system over some time. So proper design is really critical in these. Working with a qualified advisor that knows what they're doing here ensures the structure is optimized for both business liquidity needs and your long term planning. These aren't just off the shelf life insurance policies that you're going to get from your local insurance salesperson. Number 10 is a 1031 like kind exchange which defers capital gains on real estate. So a 1031 like kind exchange is a powerful strategy for real estate investors looking to defer capital gains taxes under section 1031 of the Internal Revenue Service code. When you sell an investment property, you can reinvest the proceeds into another like kind property and that allows you to defer paying capital gains tax on that sale. So this allows your investment to continue growing without the drag of immediate tax liability. To qualify, there are strict rules that you must follow. You must identify a replacement property within 45 days of selling the original property and complete the purchase within 180 days. That part can be a little tricky depending on the market and the property involved must both be held for investment or productive use in a trade or business, you can't have it for a personal residence that doesn't qualify. So investors often use successful 1031 exchanges over decades to continuously defer taxes and build larger portfolios. For investors looking to get out of direct ownership, which I come across quite often, they don't want to be in real estate anymore, but still want the tax advantages of of tax deferral can utilize what they call it's a syndication of a dst, a structure by working with a qualified financial advisor with experience working in the area using a dst. Just keep in mind that this is a deferral, not an elimination of tax. If the replacement property is eventually sold without any exchanges, the original deferred gains do become taxable at that time. So just careful structuring and professional guidance, as always, are essential to executing and being compliant with these types of exchanges. Number 11 the last one here is Opportunity Zones. So deferring and eliminating capital gains, this is another it's similar to a 1031, but opportunity zones. Again, they were created by the Tax Cut and jobs act of 2017, so they're newer than what a 1031 is. But it does offer a unique way for investors to not only defer, but potentially eliminate capital gain taxes altogether. By reinvesting realized capital gains into a qualified opportunity fund, investors can defer paying taxes on those gains and depending on what some of the new regulations are, if you defer them for 10 years, then it can have significant tax advantages. So the real benefit obviously comes with time. So if the OZ investment is held for, like I just said, 10 years, any appreciation on that new investment can be completely excluded from capital gain taxation. So this makes Opportunity Zones a unique and powerful strategy for business owners, for real estate investors, or anyone realizing significant gains from the sale of stock and real estate or a business. So it's not just limited to real estate. It's important to note that Opportunity Zone investments come with risks because projects are often located in developing areas and there are strict requirements for how capital gains our capital must be deployed and managed inside the fund. And these are honestly a little bit out of favor at the moment, at least until we get more guidance on the new tax rules expected from the new administration. But I would definitely keep this on your radar when considering these Opportunity Zones. Due diligence is critical and professional advice is recommended to ensure alignment with your overall investments and tax strategy and just ensuring that you're not taking on way more risk than what you're intended. Just be sure you're working with experienced professionals. All right, there you have it. 11 tax strategies to consider that may help you save money when it comes to your tax bill. And of course, not all these are for everybody, but there is likely something here that I mentioned in today's show that could potentially benefit nearly anyone who is an accredited investor or business owner. But here's the deal. The tax code doesn't reward procrastination. Every day you wait is money left on the table. Money that could be growing your business, securing your future, or funding your next endeavor. So please don't wait for tax season to roll around to begin thinking about this. It's not going to work. You have to be proactive, you have to plan, and you have to work with pros well in advance of the year's conclusion to make this work. So if you're ready to rethink your entire financial strategy or just need a little help getting across the finish line here, reach out. My team can help point you in the right direction. That concludes today's show. I am Brian Scribonia. Thank you for listening to the Common Sense Financial Podcast. Thanks for listening to today's show. If you liked what you heard, be sure to subscribe on YouTube and Spotify so that you can receive notifications when we release new episodes. I'm Brian Scribonia and this is the Common Sense Financial Podcast.

Well, thank you for listening to the Forbes top 10 rated common sense Financial Podcast. Before you go, I want to encourage you to jump over to Brian Scribonia.com to access the full archive of blogs and podcasts. And if you want to be the first in line to get new content, you can sign up for free on the Brian Scribonia website as well. If you're not following Brian on all the social channels, we'd love to have you join in on the conversation. Instagram, Facebook, LinkedIn, Twitter. He's there. Lastly, if you've enjoyed listening to today's podcast, or if you have found value in any of our content, help spread the word by sharing our videos, podcasts and posts wherever you get them. We greatly appreciate it and are glad that you took the time to join us today. Security is offered only by duly registered individuals through Madison Avenue Securities, LLC Member FINRA and SIPC Advisory Services offered only by dually registered individuals through Scribonia Wealth Management a registered investment advisor. Tax Services offered only through Scribonia Tax Consulting Mass. Does not offer billed banking or tax advice. Scribonia Financial Group LLC Scribonia Wealth Management LLC Scribonia Insurance Services, llc, Scribonia Tax Consulting and Build Banking are not affiliated with max. Scribonia Wealth Management LLC is a registered investment advisor. Advisory services are only offered to clients and prospective clients where Scribonia Wealth Management LLC and its representatives are properly licensed or exempt from licensure. Investing involves risk including the potential loss of principal any references to protection, safety or lifetime income generally referred to fixed insurance products, never securities or investments. Insurance guarantees are backed by the financial strength and claims paying ability of the issuing carrier. This podcast is intended for information informational purposes only. It is not intended to be used as the sole basis for financial decisions, nor should it be construed as advice designed to meet the particular needs of an individual situation. Build Banking is a DBA of Scribonia Insurance Services, llc. Benefits and guarantees are based on the claims paying ability of the insurance company, not FDIC insured. Results may vary. Any descriptions involving life insurance policies and its use as an alternative form of financing or risk management techniques are provided for illustration Purpose purposes only will not apply in all situations, may not be fully indicative of any present or future investments and may be changed at the discretion of the insurance carrier, general partner and or manager and are not intended to reflect guarantees on securities performance. The term Build banking, private banking alternatives or specially designed life insurance contracts are not meant to insinuate that the issuer is creating a real bank for its clients or communicating that life insurance companies are the same as traditional banking institutions. This material is educational in nature and should not be deemed as a solicitation of any specific product or service. Build Banking is offered by Scribonia Insurance Services, LLC only and is not offered by Madison Avenue securities, llc. Our firm is not permitted to offer and no statement made during this show shall constitute tax or legal advice. Our firm is not affiliated with or endorsed by the US Government or any governmental agency. The information and opinions contained herein provided by the third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by our firm. References to build banking, private banking alternatives, or specially designed life insurance contracts are not meant to insinuate that the issuer is creating a real bank for its clients or communicating that life insurance companies are the same as traditional banking institutions. This material is informational in nature and should not be deemed as a solicitation of any specific product or service. Build Banking is not FDIC insured. Build Banking is offered by Scribonia Insurance Services, LLC only and is not offered by Madison Avenue Securities, LLC nor Scribonia Wealth Management, llc.

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