When you work for your employer or own your own business, there are two types of income generated: pre-tax and post-tax dollars. It is vital you understand these. To many entrepreneurs just look at their business checking account and think “Oh cool, I have $17,000 in the bank! I am doing well!” but in reality, are they? You must subtract expenses from the money in the bank, but you also need to figure out your tax obligation. When you work for someone and make $60 an hour for example, you will make $2,400 over 40 hours, but how much of that do you actually see? $1,700ish?
Taxes can be one of your biggest expenses in life… if you let it be. Having your own business is one of the best ways to legally decrease your personal tax obligation. Nothing else will decrease your tax bill like a business can. If you know of another one, please let me know.
When you work for your employer, you must pay income and payroll taxes every time your paycheck is issued, unless you are a 1099 employee. You simply cannot get around this, it is a reality of life in this country. When you own a business though, it is a little different.
Let’s run an example with $17,000 in a practices bank account. We will assume this practice has $4,000 a month in overhead, therefore the profit in the bank is $13,000. Great, so does that mean you can just withdraw $13,000 from the account? Well no, you are going to eventually pay taxes on that. Depending on your LLC structure, that tax rate will differ. We will assume you are going to be taxed at 30%, therefore the $13,000 turns into $9,100. Not to bad. So, now you have two numbers, you have a pre-tax profit of $13,000 and a post-tax profit of $9,100. You just forked over $3,900 to Uncle Sam. You need to learn how to use pre-tax dollars so you can decrease that tax obligation legally.
As a nurse practitioner entrepreneur, how can we maximize those pre-tax dollars to its fullest? By having as many business expenses as possible. I have discussed this throughout the blog and in The Elite Nurse Practitioner Model eBook, but I will explain it again. When you make money in your business, it is considered pre-tax money. Those pre-tax dollars can be spent on businesses expenses tax free. Whatever profit is left over, is then transferred to the owner and/or stakeholders as compensation. That profit/compensation is then taxed based off of your income level. These taxes can include federal income tax, Social Security, Medicare and state income tax if applicable. This is based off the LLC structure you utilize. Therefore, to decrease your tax liability, it is important to utilize every legal tax-deductible business expense you can. This will maximize those pre-tax dollars because the pre-tax profit will decrease as the business expenses increase. This is done by having as many legal business expenses that also overlap into your personal life as possible. As always, seek advice from your CPA or tax attorney before implementing any information provided through this blog.
So, what types of expenses can you write off through your business that are also a necessity to your personal life? There are dozens and you need to know about as many of these as possible. Do not give your hard-earned money away to taxes if you can legally write off expenses. Way too many people in this country do not utilize the tax code to their full advantage. This is why it is critical you have a good CPA. Your congressman and congresswomen do it, so should you.
What are common expenses you can write off through your business?
- Cell phone: Everyone has a cell phone. When you start a business, you will be utilizing that phone all the time checking emails, texts, bank accounts, making phone calls etc. Well, you also need a cell phone for your personal life as well. Make sure your business is paying for your phone. If your cell phone bill is $200 a month, that is $2,400 a year. At a 30% tax rate, you just saved yourself $720 in taxes by having it as a business expense.
- Business meals: Every time you go out to eat, you need to talk about business. There is no time requirement for how long business is discussed for. Business meals are 50% tax deductible. Let’s say you spend $5,000 a year going out. You can write off $2,500 of that. At a 30% tax rate, you just saved yourself $750 in taxes by having business meals.
- Business meetings/functions/parties: Having a large family or friend get together? Are you going to try to obtain a client or some business through it? Talk about business for 10 minutes to a few people, now the food and expenses associated with it are 100% tax deductible. Let’s say you host multiple family/friend get-togethers throughout the year and spend $2,000 a year for the food associated with it. At a 30% tax rate, you just saved yourself $600 in taxes by having business functions vs. family dinners.
- Business vehicle: This is one of the biggest expenses you can have. Your business vehicle is deductible through depreciation and the gas/maintenance/insurance are 100% deductible. You own a telemedicine practice that you function out of your home, right? Well, as soon as you leave your home, you can start writing off mileage as long as some sort of business is being conducted. Let’s say you drive to your part-time job, your other clinic, to the grocery store to pick up food for your business function, to Olive Garden for a business meal, etc. All those miles are now tax deductible. This will literally save you thousands a year in taxes. New tires? Damn it, they were $1,200! At a 30% tax rate, you just saved yourself $360 in taxes by having it as a business expense.
- Business trips: You are a nurse practitioner, therefore you must stay up to date with the latest in medical information. Ensure every vacation you take has some sort of CME activity involved with it. Your vacation just turned into a CME related business trip. There are dozens of “cme vacation” websites that will provide you a CME course that can be done wherever you want. Just Google “CME vacation courses.” Business trips are 100% tax deductible. If you spent $4,000 on airline tickets, hotel, food, etc., at a 30% tax rate, you just saved yourself $1,200 in taxes by having a business trip vs. a personal vacation.
Do you see the power of utilizing those pre-tax dollars? This is why owning a small business is the number one way to minimize your tax bill. No other tax deduction or special credit will ever amount to what you can write off through a business other than rental real estate (which is still considered a business in reality).
Based off the examples above, that $13,000 pre-tax profit just turned into a $5,400 pre-tax profit when you factor in all those expenses and the business vehicle you can legally run through your business. So now the $3,900 tax bill just turned into a $1,620 one. You just saved $2,280. Hell yes, go get that hot tub you have been wanting now…
That post-tax number really doesn’t mean anything. It is that pre-tax number that matters. That pre-tax number will decrease if you understand what you can legally deduct with your business. Everyone needs a business vehicle, food, utilities, cell phone, gasoline, insurance, etc. You need to understand what can overlap into your business and personal life legally. This is where a good CPA comes in. I cannot stress this enough, find an aggressive CPA that fully understands business tax code. The person who does taxes over at the booth in Wal-Mart does not! If you understand the tax code and have a good CPA, you can decrease that pre-tax profit significantly, which will ultimately save you thousands of dollars a year.