Why business owners pay less tax—and how you can too (even without a business)

It’s a beautiful day and a beautiful week so far.

To start, some of you may have heard, but most of you not, that I left EY this past week and am now doing Contender Financial work full time! I left EY and joined Contender Financial with a local CPA firm here in Utah called Bement & Co, and we’re forming Bement Advisors. You all will still hear from me weekly, but now if you want to work together I will be able to bring the resources and services of a full firm to your service. I feel it’s a win-win-win for everyone involved.

With that said, let’s move on to today’s topic.

Have you ever wondered why business owners seem to pay less in taxes?

Well today I’m going to teach you exactly why that is and how you can apply it in your own life. 

The key is to understand the tax formula and how it changes the moment you become a business owner.

The Standard Tax Formula

For most of us, we earn money, we pay our taxes, and we live off of whatever is left over.

At its simplest, our tax formula looks a lot like this:

Standard Taxpayer Tax Formula

The unfortunate truth is that we’re more or less stuck with whatever is left over after we pay our taxes without much we can do about it.

Yes, with good planning, especially at higher income levels, you can do things that will save you thousands of dollars a year, but not tens of thousands a year like business owners can.

So you’re probably saying to yourself, “ok Rob, then what do I do?”

The short answer: become a business owner in ANY way.

The moment you do, your tax formula fundamentally changes.

The Business Owner’s Tax Formula

For business owners, there is a subtle shift in their formula that makes all the difference.

It changes like this:

Business Owner Tax Formula

Instead of first paying taxes and then living off of whatever is left over, they first pay all of their business expenses and then pay taxes on whatever is left over.

This small difference unlocks a whole host of things that previously wouldn’t have been a tax deduction and makes them deductible. Things like…

• The expenses for your car

• Travel

• Health care costs

• Fitness equipment

• Meals & entertainment

• Education costs

• And more!

As long as there is a legitimate business purpose for the expense, it is ordinary and necessary for a business like yours, and properly documented, well then it can be deducted.

Often business owners are able to take things that were previously just personal expenses in their lives and turn them into tax deductions by simply changing the facts and circumstances of their life to qualify for the deduction.

But I don’t have a business

Now I know some of you reading this are saying to yourself, “but Rob, this is all good and fine, but I don’t have a business so this doesn’t apply to me.”

Hold on a second, don’t walk away too quickly.

You may be leaving thousands of dollars in tax savings on the table without realizing it.

According to the IRS in order to have a legitimate business one of the most important factors is the INTENT to generate a profit.

With this in mind, there are dozens of ways that high income W-2 earners could create a business.

• That hobby you’ve had people asking you questions about that could turn into a consulting gig or product business

• The area of professional expertise you have that your friends keep asking you about that could turn into a consulting business 

• That investment strategy you’ve been working that just needs to be tweaked so that you’re now in the business of investing

• That business idea that you and a buddy had a while back that you don’t have the time for but with a little tweaking and structuring could maybe be a more passive opportunity

• Your kid’s money making schemes that you could support and help them learn money management and sales skills

I think you start to see my point here. There are lots of ways in which you could take something in your life and turn it into a business and start to create tax deductions for yourself.

I call this “busine-fying” your life.

Now this doesn’t mean that all of the ideas above will save you thousands of dollars a year on your taxes, but it’s about the mentality of turning every day things into business opportunities and reaping the benefits that are right in front of you.

Cause like I said above, by simply changing the facts and circumstances of your life you can qualify for tax deductions.

Conclusion

If you’re thinking you may have something that could qualify as a business for tax deduction purposes and want to see the potential tax savings from it, hit me up. I’d love to help you apply the things I talk about in this weekly newsletter.

If not, then keep an eye out for things in your life that you could easily turn into a business. I bet there are more things around you than you recognize at first glance.

Till next time, remember, success leaves clues and contenders are always wanted.