Top Tax Moves For Entrepreneurs in 2021

Taxes, taxes, taxes…the mere mention of taxes can stress some people out. I get it AND it is a fact of life that as entrepreneurs we simply need to deal with. This year though brings a bit more uncertainty about what could happen with your taxes and the new Biden administration.

Here's the deal though, although the expectation is that taxes will go up during the administration, we don’t know when or by how much. So all we can do is make the right tax moves based on the current laws.

The fact is the tax dude or dudette is just a part of being in business. But businesses have unique benefits that we can take advantage of (legally).

Here are some of the top tax moves for you to consider in 2021:

Bundling Charitable Donations — Because of the new tax act that took effect in 2018, many people do not qualify to itemize their deductions. This is because the new law limited the deduction for real estate taxes and state income taxes to a maximum of $10,000 and it raised the standard deduction allowed to $25,100 for a married couple and $12,550 for singles (these are the 2021 amounts). Here’s what that means to you unless the total of your mortgage interest paid, the state and real estate taxes (maximum $10,000) plus your charitable donations and medical expenses add up to more than $25,100 (if you’re married or $12,550 for singles) you get no benefit.

Let’s assume you make annual donations to your church, temple, or other charities though. By bundling 2 year’s worth of contributions into a single year you can maximize the deductions.

Here’s an example let’s assume for 2021 your real estate taxes plus state taxes are $8,000, mortgage interest was $10,000, and donations were $7,000 for a total of $25,000. You wouldn’t qualify to take any deduction because you are under the threshold of $25,100 for a married couple. And if you did the same thing in 2021 and 2022, the maximum deduction you get is the standard deduction for each year or $50,200 ($25,100 x 2).

But by bundling your donations for both 2021 and 2022 in 2021 your total deductions would actually be $32,000 for 2021($8,000 + $10,000 + $7,000 + $7,000). Because you made 2 years’ worth of donations in 2021 you would get a deduction on your tax return would be $32,000. More importantly in 2022, you would still get the standard deduction of $25,100. The total deductions then for 2021 and 2022 combined would be $57,100 ($32,000 + $25,100). This is almost $7,000 of additional deductions and all you needed to do is make your donations for 2 years in the same year.

Home Office Deduction — This deduction one of the most often missed deductions usually because people are unaware of it or they are misinformed about it. A home office deduction is more important in the current “work from home” world we live in. It allows you to deduct a percentage of things like rent, taxes, utilities, repairs, and other home expenses for the space you use for work.

Typically, the space needs to be exclusively used for business and you should be able to document the use. Some business owners are under the mistaken impression that it raises your chance for audit but that’s not necessarily the case. Additionally, so you don’t need to worry about all the recordkeeping the IRS now allows you to simply take $5 per square foot for up to 300 square feet as a deduction. This can amount to a $1,500 deduction each year added to your other business expenses.

Hire Your Child — This is one of my favorite deductions for a business owner with children. Under the current law, you can pay your child (under 18 years old) a salary from your sole proprietorship (not a corporation or partnership) and not have to pay any Social Security, Medicare or Federal unemployment tax on the wages paid. This alone can save you almost 14% on every dollar paid to the child without even considering the income taxes you would save.

Let’s take it one step further, your child gets their own standard deduction equal to their earned income (not to exceed the current limits). So watch this…pay your child a wage of $5,000 for the year. You get a business deduction for the full $5,000 and not pay any Social Security, Medicare or Federal unemployment taxes on it. But also your child would offset the amount by their standard deduction and not pay any income tax on the amount either. I used this strategy with my son to allow him to pay for his lunches, toys, and even clothing but it was really a good way to teach him about money, investing, and responsibility. Now one caveat, the amount you pay your child must be at a level that is appropriate for the work they do.

Although there may be many other deductions such as retirement accounts and more creative strategies, these are a good start and can make a huge dent in your tax bill.

Bottom line, take control of your taxes by understanding some of the basics so you can keep more in your pocket for you, your family and your future.