Are You Overpaying Taxes?

The King James Bible is about 1400 pages long, and the Gettysburg Address had only 272 words. Then there is the US code. It’s a maze of 6,871 pages, with the IRS instruction guides adding over 70,000 pages.

70,000 pages.

There is no way the average contractor can possibly know all the ins and outs of taxes. Have you done cost segregation on your building? Is your business entity a tax problem? Are you deducting your home maintenance expense for their business use percentage? What about all of the free tax credits? Messy. 

Despite the noise, most contractors feel like they “have a good tax guy,” but are you sure? In fact, how can you be sure if they don’t specialize in the trades and you don’t have strong first-hand tax knowledge yourself? $12K in annual tax savings could be over $2.2M if invested properly over 30 years… don’t rely on your “good tax guy” feeling while paying your retirement into the IRS’s bank account. 

While there are numerous tax-related issues to address for the trades, here are a few to watch. We’ll write more on these and others soon.

  • “Augusta Loophole”: Short-term (i.e., 14 days or less) rentals of your personal residence are not taxable. You can create bonafide usage of your personal residence, pay yourself rent at a market rate, and receive the money tax-free. Make sure to document properly and massage the fine print. Business rent deduction + personal tax-free income = big savings.
  • Paying children: If your 10-year-old helps manage your social media, you better believe they should be paid market-rate compensation. The same is true for any service that your children provide to the company. The best part – your child’s standard deduction means no income tax on $13K+ in 2023! Business payroll deduction + personal tax-free income = big savings.
  • Pass-Through Entity: Many states have enacted pass-through entity taxes (PTE), allowing partnerships and S-corporations to take top-line federal deductions for their state taxes. Overlooking this could RISK LOSING YOUR ENTIRE DEDUCTION.

Clear as mud?

If you need help with insights or are interested in more tax, financing, business strategy, and financial management ideas, we have a Facebook group (which some of you may have come from to read this) that we invite you to join. No sales pitches, just building a community of contractors where we can all discuss and share financial best practices, tips, and tools to help you become a multi-million dollar contractor.

Check out the group here and if you have any questions about developing a real tax plan from a firm that specializes in the trades, give us a call. Sadoff can help.


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