Tax season can be a very stressful period for small business owners, especially if they’ve incurred a lot of financial losses during the previous year. But what if there was a way to offset some of those losses and expenses? In this episode, Jon Aidukonis and Gene Marks share four strategies that will enable small business owners to become eligible for tax deductions this coming April.
Podcast Key Highlights
- Four Strategies That Will Earn Your Small Business a Tax Deduction
- If you own stocks that went down this past year, you can do what is known as a wash stock sale. In a wash stock sale, you sell your stock at a loss and then, offset that loss against any capital gains. Finally, after 30 days, you can buy back that particular stock.
- Another tax strategy you can use when the economy is down is called a Roth IRA conversion. During this process, an individual will take money out of their 401K, while withdrawal tax rates are low, and deposit it into either a Roth 401K or a Roth IRA so that any interest generated by these accounts will be tax-free.
- You can also earn a tax deduction by doing a sale leaseback of your property. To do a sale leaseback, you sell your property to someone who will lease it back to you long-term. This process enables you to cash out, and then when you make your lease payments, you become eligible for a full tax deduction for the full amount of that payment.
- Lastly, Congress’s bonus depreciation policy enables you to deduct the full cost of any business-related equipment expenses against your income.
The views and opinions expressed on this podcast are for informational purposes only, and solely those of the podcast participants, contributors, and guests, and do not constitute an endorsement by or necessarily represent the views of The Hartford or its affiliates.
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Jon: Hello everybody, welcome back to another episode of Small Biz Ahead, the small business podcast presented by The Hartford. This is Jon Aidukonis. I am joined with Gene Marks today. Hello, Gene.
Gene: Hello, Jon. We’re talking taxes.
Jon: We are, and I owe them I think.
Gene: Well, first of all, anybody listening to this they saw that the topic was taxes so they’re either really into it or they’re just like a masochist. They’re just like “You know what? I’m going to listen to something that’s just going to give me a headache for the next 20 minutes.”
Jon: It’s true. I’ve had a lot of conversations around tax returns the past couple weeks.
Gene: No, it makes sense. Okay. As a CPA, I just want to share with everyone listening and with you Jon some of the big sort of tax moves that people are making. This is not a year end thing, this is more like a situational thing because it’s based on the economy and based on some of the things going on, okay? First of all, okay, I’m having a lot of clients do wash stock sales. Do you know what a wash stock sale is?
Gene: It has nothing to do with the dry cleaners, it has to do with this. The stock market has been pretty lousy the past year, so a lot of people have lost money on their stocks. Now is an opportunity if you sell your stock at a loss you can offset that loss against any capital gains. So if you had any good stocks that you made money on you won’t have to pay any taxes on that, you can offset these losses. And, by the way, if your losses go even up to $3,000 above the capital gain you can deduct that against your income as well, your regular income so it’s a big deal. In a down market period, which is what we’re in right now, people sell stocks at a loss to offset it against some of the stocks that have gained money because it’s a very tax advantage thing to do.
Gene: One thing to tell you. If you’re holding any stocks that you really love… I hold stock in… I won’t name them but they’re a giant company that sells a lot of things online from books to products to… But I’m not going to name them, okay? And I do watch a lot of their TV shows that they stream as well but I’m still not going to name them. Anyway. I hold their stock. That stock has gone down a lot over the past year. I don’t really want to sell it but… But I am because I’m going to sell it and take the loss against some gains, and I’m going to wait 30 days, and then I can buy the stock back, and the IRS allows me to do that. That’s called a wash stock sale. You wait 30 days before you buy the stock back. Because if you just sold it at loss and bought it back the next day that’s not good. The IRS wouldn’t allow you do to it. Does that make sense?
Jon: It does.
Gene: For everybody listening, if you’ve got stocks that went down, sell them, offset them against your stocks that went up. So that’s number one. Number two, and I’m going to stay on the topic of stocks because it’s the environment they are. You’re still awake, right? Okay.
Gene: I just want to make sure of this. Roth IRAs, okay, so this is not your Hyman Roth from the Godfather, this is a Roth guy who I think was in Congress and this is named after him. A Roth IRA is a retirement plan. When you put money into it your money grows tax-free. Okay? That’s great. So you put money down. It’s after-tax money. So whatever money you have in your net paycheck, if you want to put money into a Roth IRA, you can do that. And then if it gains over the next 20 years you don’t pay any taxes on that gain so that’s cool. Okay.
Gene: So I have a lot of clients now that have a regular 401K account, which I’m sure you have, who has probably gone down in value because again, the markets haven’t been great. They’re taking distributions from their 401k account, they’re paying the tax on it, because you have to do that, but the tax is lower because their market value has gone down. In a down market, they pay the lower tax, then they take that money, they put it into a Roth 401K or a Roth IRA and that grows then going forward in the future tax-free. So it’s called a Roth IRA conversion. Are you still with me?
Jon: I’m there.
Gene: Okay. So it’s a matter of taking money.
Jon: It’s like chemistry.
Gene: And you’re in marketing so that’s not saying… Now I’m concerned. But it’s a matter of taking advantage of the stock market going down and taking these losses and off sending them against gains for your advantage. So talk to your accountant, obviously. I want to make sure so that The Hartford compliance people approve this conversation. This is advice coming from me, not from The Hartford. This is advice that you want to talk to your accountant about. But take advantage of a Roth IRA conversion and take advantage of a wash sale of stock. So those are two things, okay?
Gene: I just have two more things, and hopefully, I’ll let you go without you jumping off a cliff. Number one, I’m seeing a lot of my clients do sale-leasebacks of their property. The average age of the American small business owner, Jon, is 55 years old according to the Small Business Administration. So a lot of people thinking about succession planning and exiting. A lot of businesses own property, right? Well, property values, although they’ve been declining a little bit but they’re still pretty up there elevated to where they were. So people are cashing out on their property now, they’re selling their property, they’re getting a check, and they’re banking it. But they’re selling it to somebody who will then turn around and lease it back to them long-term.
Gene: In a time right now where you’re getting on a succession planning age, your property values are still relatively high, sell your property to somebody that will lease it back to you for 10 years or 15 years or whatever it would be. That way you can cash out, and then when you make your lease payments you get a full tax deduction for the full amount of that payment. Whereas if you’re just paying a mortgage on the property you only get the interest deduction. So anyway, I’m just telling you I’m seeing a lot of people sell their properties and then lease them back. That’s been a trend along the way.
Gene: Finally, finally, bonus depreciation. So that is if you buy a piece of equipment you can deduct almost a full value of it based on when you put it into service. If you buy a piece of equipment and you finance it, you might not start making the debt payments for whenever but you can take the full deduction for it as long as you plug it in or it’s an operation and putting into service. Now we’re recording this right now so I just want to say this. We’re near the end of 2022. I don’t know when this is going to be posted, Jon, but Congress is considering extending this to continue to allow 100% deduction. I do expect that to happen. So I’m expecting, even if you’re listening to this in 2023, that is… You’ll be able to deduct 100% of this… The equipment that you buy against your income, and that’s a huge tax deduction that a lot businesses can take.
Gene: So four big tax moves. Let me recap. Wash stock of sale, okay? If your stock is going down offset your capital losses against your capital gains. Number two is convert to a Roth IRA because that’s another thing you do when your market values go down. Number three, consider selling your property and leasing it back because those are big tax advantages. And number four, take advantage of bonus depreciation. Otherwise, buy capital equipment, put it into service, and take a full tax deduction for the full amount of equipment. Are you still there? I’m looking at you, you seem like you’re awake so that’s a good sign. Do I still have you here?
Jon: I’m there.
Gene: All right, that’s great. I don’t even want to ask you if you have any questions because I’m afraid you’ll be like “Oh no, he just put me on the spot and if I… I haven’t even been listening to this.” Do you have any questions, Jon?
Jon: I don’t think questions on this. I think I’ll reiterate. You should talk to your personal tax advisor or financial counselor.
Gene: And let me add something to this, okay? And this is the joy of doing this face-to-face because I can point at you and say, “Wait a second I’ve got something to add.” Here’s what I do have to add to you. You mentioned about talking to your tax accountant, whatever. For God’s sake guys, if you’re listening to this, if your tax accountant tells you to pay estimated payments make the estimated payments, okay, because you don’t want to be in a… Don’t blow them off because then you’re in a situation where you owe a lot of money that you should’ve been paying in.
Gene: Meet with your accountant twice a year, okay? I mean, you want to meet with them in, okay, obviously, at tax time. Meet with them in late summer, early fall because depending on where you are in the end of the year your accountant can adjust those tax payments. I mean, if you’re not making as much money you can pay less estimated taxes. Why pay in too much? Plus, your accountant will have some opportunity to maybe give you some tax strategies before the end of the year. I hate it. Sometimes just like TV stuff, and they always ask me to come on for year-end tax tips on December 30th which is insane. People that are really smart, they do their tax strategies for the end of the year four months before the year ends so they have time to make those moves. I want to make sure I get that in there as well.
Jon: Sounds good. And I mean, you hit on it too where you talked about… I think succession planning is going to be more and more of a thing.
Gene: Yes. Oh, we have to do some future segments on succession planning because it’s selling your business or buying a business so it’s applicable not just to older business owners but to younger business owners that want to get into a business. We have lots of topics to talk about there. Tax-related but also more strategy and value related.
Jon: All the fun stuff. Taxes, beneficiaries, trust, executor, we got them all.
Gene: All the fun stuff. You make it that because you’re a marketing guy and that’s what you like to talk about. Or a restaurant industry which is super fun. The fact of the matter is, all this boring, horrible stuff is pretty much-
Jon: Stuff you need to know.
Gene: Stuff you need to know to run a business.
Jon: All right my friend. Well, thank you for the update.
Gene: Thank you, Jon.
Jon: And thank you everyone listening we will catch you on the next one.
Gene: Take care.
The material should not be considered tax, financial, or legal advice. The Hartford assumes no responsibility for legal compliance with respect to your business practices. And the views and recommendations contained herein shall not constitute our undertaking on your behalf or for the benefit of others to determine a warrant that your business operations are in compliance with any law, rule, or regulation. Those seeking resolution of specific legal or business issues, questions, or concerns regarding this topic should consult their own attorney or business advisors.
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Ok, first, a wash sale disallows any losses on your trade IF you buy that stock back within the 30 days of sale. If you really want to take a loss, sell it at a loss and don’t buy it back until after the 31st day. That way you can take the loss against gains but any net loss is limited to a deduction of $3,000 per year.
Second, on a sale lease-back, there is no way to deduct your lease payments unless you are using it as business property. If you’re renting an apartment you don’t get to deduct that as a personal residence. The good news is, if you sell your home, lease-back or not, up to $250,000/single or $500,000/married of your gain on the sale is exempt from taxes (with a couple of conditions).