Why You Need a Business in 2021? Why you absolutely need to have a small business, here are the reasons. Everyone whether you have a job or you do not have a job, you need a small business. In this article, we are going to share with you three incredibly powerful reasons why you need a business.
- Pre-tax Power
When you have a small business you are able to purchase certain things for your business and that is done before income taxes are calculated. Now, this is where it gets very important that you understand the math behind what we mean by pre-tax. So let’s say for example that portion of your income or when you combine you and your spouse’s income is at the twenty-five percent federal income tax level and then you may have some additional state income taxes as well.
So at twenty-five percent, if you, for example, let’s assume you have to commute to work with your vehicle every day that vehicle you purchased after you had already paid your twenty-five percent in income taxes. Because in this example you are a W-2 employee, well the problem with that is, you just technically paid twenty-five percent more for that vehicle and we know you probably got a loan. But still calculates big number right or what if we’re talking about something smaller and simpler maybe it’s a brand-new Microsoft Surface laptop and you just spent $1,200 on it you would have bought that what we would call post-tax because you would first pay 25% and income taxes and what the money you had leftover is what you bought that computer with.
Now let’s look at the difference if you bought that laptop for your business, well that would have been pre-tax. You literally notice that the exact math you literally would have saved right around 25% on the purchase value.
Many of us are bargain hunters right, you try to go after the sales and you try to find a great deal, and when you purchase something well if you are able to buy something at the Pre-tax level. You instantly save what could be whatever your tax bracket is twenty-five percent or more right at the top where there’s a sale or not now that is what pre-tax power is all about. There are many items that you are purchasing right now that ultimately could be at the pre-tax power level.
So there are legitimate things that you are purchasing in your life that as if you’re a W-2 employee you could put that in your business and you would get a huge savings on the purchase because you would have what’s called pre-tax power.
Second reason why you need a small business is because of the allowable deductions. This is not that complicated subject but you need to hear what deductions can really do for you.
First is this there are aome deductions that you can take that don’t cost you any money, they just give you a deduction. As an example, Home office deduction, and with a home office deduction you’re deducting ascertain square footage and there’s ascertain calculation for that. It’s not a huge deduction but it is one right and you are able to take the advantage of it just because you have a small business. And more importantly you have to spend any money for it you already have a home you living in so, deductions can be in the form of a home office.
Another thing to consider is this earlier we were talking about Pre-tax power, assume if this was a vehicle you purchased and it was the right type of vehicle (There are list of vehicles types approved by IRS) and again you’d have to talk to your accountant all that stuffs and verify. Let’s say for example, you have the right vehicle and you got a loan on that vehicle. Well you wouldn’t have had to pay all cash out of your pocket with the purchase now. The purchase would have already had this, but what’s so nice is you get a deduction on the entire purchase for certain vehicles. So now all of a sudden you have a huge deduction in your personal income taxes becasue of this reason. And it’s a tool that you need to know, you need it because you have to drive back and forth to whatever work you’re doing. But see if you’re a W-2employee you don’t get that benefit, you have to go back and forth to work but you don’t get to deduct that vehicle.
So above we talked about deductions such as a home office or a vehicle but there’s yet another. If we know it’s a big IF your small business actually makes a little bit of money, but we hope it does and regardless of the type of a small business, if it makes money there is a qualified business income deduction that now exists thanks to the latest tax updates. In the United States, it’s a 20% discount on any income.
Very long-time accountants and bookkeepers have argued well the problem with owning a small business, especially if it’s an LLC and it’s taxed as a sole proprietorship or as a partnership you have to pay self-employment taxes on the earnings which are above and beyond your you are federal income tax, and that’s true. However, now that we have this 20% deduction, that pretty much negates that extra cost, not completely but pretty much, so that’s really exciting it’s leveled the playing field. And in fact, if your employer is giving you the option of either being a W-2 employee or a 1099 independent contractor, you want to be 1099, and you want your money to go to your LLC entity. So that you not only can take advantage of this deduction and potentially get in the vehicle deduction. This is a big deal right here this has really changed the fabric of the small business.
- The Retirement Plans
The third incredibly powerful reason why you need a small business, again whether or not it makes any money you still need it and that is the retirement plans. Plans like Solo 401k, you will have just so a 401k set up. You can borrow up to $50,000 out of it at any time kind of how much is in there. You could invest in anything including a real estate which gives you a lot higher returns and simply buying something such as an index fund or mutual fund or stocks.
The solo 401k is the best retirement plan available for small business owners. But there’s one more option, that is what’s called a defined benefit plan. A defined benefit plan allows you to sock away even more money. It was designed for people that had fallen behind on retirement, and they had to play catch-up, and maybe that’s the best solution for you. So you can do some real estate deals, make a bunch of money, and then sock a lot of it away. So find a good benefits plan; it’s not as flexible as a Solo 401k. It doesn’t allow you all the great tools as 401K does. But this one has a max on how much you can put in. It’s still a lot higher than your typical employer-sponsored 401k. Again if you really want to go high power on this you can do both as these things are only available to those with small businesses.
Above mentioned options, you really need to take full advantage of because it’s right out in front of you. Whether you have a job or not no matter where you are what your circumstances are you need to be taking advantage of this. And if you already have a small business you should be taking advantage of it all.