A few years ago, a client, who, incidentally, is a doctor, plead with me for tax deductions (like there was something magical that I could do). The simple truth is that to get a “tax deduction, you have to spend money”. So, if that is the case, doesn’t it make sense to spend it on something that will benefit you?
There is a situation where you can spend your money on yourself and also get a tax deduction. It’s called a retirement plan. Granted, you will have to pay taxes on it when you take it out, but we have many clients who strategically take their money out over many of their retirement years when they are in lower tax brackets. My favorite retirement plan for a small business owner is a Solo 401(k) Plan because you can generally defer more compensation (which means bigger tax deduction). If the owner and spouse are the only employees, they can establish and contribute to a plan without having to comply with the complex discrimination tests that must be met if other employees are involved. In addition, the annual Form 5500 does not have to be filed with the Department of Labor if the plan has under $250,000 in assets.
Here’s an example. Bob (age 50) and Jill (age 50) own ABC Insurance Agency, LLC. The LLC is taxed like an S-Corporation. Bob and Jill each take a $30,000 salary. In 2020, they can put in $33,500 (some from their paycheck and some from company contributions) EACH to their retirement plan. The result is a $67,000 tax deduction (and the money is still theirs)!