How the Right Taxation Structure Helped Two Partners Take Money Out TAX FREEMay 13, 2022
Implementing the right tax structure is difficult if you don't know what you can deduct. Find out how to identify your deductibles for tax purposes.
Understanding your tax situation is one of the most crucial aspects of running your business. Without that knowledge, you could be depriving yourself of substantial profits.
Take Chris and Jason, for example.
The two are partners and run a construction company. And when they approached us, they needed help taking money out of the business that would be equitable to both. After all, they happen to have very different lifestyles.
With the two of them being equal shareholders, it was essential to minimize the amount of money taken out. If the company structure is poorly set up, a partner could be forced to take money out and pay taxes, even if they don't need to do that.
The situation with Chris and Jason was that one of them needed to take out more cash while the other preferred to invest it.
So, we introduced them to a new structure that will satisfy both of them.
We devised a way where both partners were able to take cash out of the business without putting it at risk if something were to happen to the company.
Then, we implemented multiple structures for the partners to take their money out tax-free and into holding corporations. Doing so meant one partner taking money out wouldn't force the other to do the same thing.
One of the ways we made this happen is by eliminating a significant amount of tax.
As a result, Chris and Jason secured their future and landed in a position of accumulating wealth quicker through more pre-tax funds they could use for investments.
Knowing your deductibles and how to reduce taxes is one of the first things you should learn. That's why this article will give you four tips on how to start deducting expenses and accelerate growing your wealth by saving money.
Tip #1 - Deduct Home Office Expenses
Some business owners can save money by chalking up home office expenses. However, this won't work for everyone as there are some guidelines to follow.
You might be eligible for deductibles if you regularly meet clients in your home office. And you could deduct a portion of your home expenses for income tax purposes if you normally operate from your home office.
But this is an area where you might need expert assistance.
The list of eligible deductible expenses can be pretty extensive. For starters, you will have to clearly define your at-home operations and work out the usable square footage of your office to get the percentage of expenses you can legally deduct.
Tip #2 - Deduct Meals and Entertainment Costs
Once again, this has everything to do with determining the eligibility of your deductions.
Typically, you can deduct meals and entertainment costs if you can prove that they were incurred during business development-related events.
For example, taking your family out to dinner isn't an eligible deduction if your family isn't working inside the business.
But even when you can deduct these costs, it's important to know that you can only deduct 50% of such expenses for business tax purposes.
Say you're taking a client out to dinner that costs $200. That means you'll be able to claim a $200 business deduction, but only a $100 tax deduction.
That said, many things can qualify as business development-related, which is why you should seek professional guidance on these matters to maximize your tax savings.
Tip #3 - Minimise Personal Taxes
Let’s use golf dues as an example here.
Golf dues aren't deductible for tax purposes in a corporate structure. However, you can still avoid paying that extra personal income tax by using the company's money to pay your golf dues.
For instance, you could claim your golf membership as a business development-related expense. After all, it allows you to network, socialize, and meet new clients.
It might still not be a deductible expense, but it can be legitimate. In that case, you can pay for it using company money and avoid paying an additional personal tax by taking it out of the business.
Now, if you want to pay for your golf dues personally, you have to take money out of the corporation. After paying tax on it, you can then pay for your golf dues.
Tip #4 - Spend Money On Things That Drive More Profitability
There are many things to spend money on if your sole purpose is to reduce your taxes as much as possible. For example, you could spend it all on something like accounting fees and end up with zero tax because your accountant took it all.
But, that's not a good approach to minimizing taxes.
That said, here's the question you have to ask yourself:
What can I deduct in my business to ensure that anything I'm spending money on is driving more profitability?
Sure, you'll want to get the maximum deduction possible on every expense.
But you also want to avoid non-essential spending just so you can get a tax deduction. After all, those situations may still cause you to lose money.
Yes, you're keeping your taxes low. But at the price of buying things that you don't need or don't help your business scale.
Think of this as the difference between buying another company car that won't be used instead of buying more inventory for projects you know you'll handle three, four, maybe six months down the road.
Deduct Your Expenses Wisely
Navigating taxation can be tricky for many reasons.
To start with, each business structure has specific guidelines and rules you have to follow. And when it comes to expenses, the explanations are sometimes purposefully vague and broad.
Having an expert tax advisor assist you on these matters is often the best way to ensure you can save money on taxes and accelerate your wealth.
With that in mind, there are two golden rules to follow:
First, you have to remember that you have to prove expenses are business-development related for their deductions to count for tax purposes.
Secondly, if you want to spend money just to minimize taxes, it's best to always put that money to good use by investing it back into the business.
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