Income Shifting Can Be An Easy Business Tax Deduction

Income shifting is a legitimate business tax deduction.

Want to save money in taxes without working harder? Here’s a business tax deduction that may help you do that: shift income to family members.

How to Shift Income

The general idea is that you can shift income from a high tax-rate family member to a lower or zero tax- rate family member. For example, you can legitimately shift income to your kids, potentially saving thousands in taxes. Let me give you an example.

“Renee” owned a consulting business. She had two teenage sons that legitimately did work for the business. Their tasks included vacuuming the offices, emptying trash cans weekly, recycling and shredding documents, filing receipts, stuffing envelopes and doing yard work outside the office. “Renee” plans to pay her sons $5,000 each for the year. She was able to shift $10,000 from her high tax rate of 38% to her son’s zero tax rate, resulting in a $3,800 tax savings. She plans to use this $10,000 to teach her kids about budgeting.

Easy Business Tax Deduction

This income shift also helped with her personal cash flow because she has the kids help pay for groceries. Another thing she plans to do is to put money aside in a Roth IRA for the kids. While the company will need to pay some payroll taxes, the savings far outweigh the cost. What a great business tax deduction – and it was easy!

Of course, there are some rules you have to follow. Here are the guidelines for shifting income to family members:

• Your kids can be 10 or 30 years of age
• They need to keep a time card for work done – documentation is key
• The work needs to be appropriate for the age and skill level
• Depending on the situation, your child may not have to file a tax return
• Consider helping parents or grandchildren who might be in lower income brackets

Depending on your business entity, you can also reduce self-employment taxes with this strategy. For corporations, it is a great way to reduce the taxable income. If you are a sole proprietor, there are some taxes the kids don’t have to pay in their paycheck. And, the IRS allows this, but they don’t volunteer the information to you.

There are several options to reduce your taxes, depending on your situation. To take advantage of the opportunities, talk to someone knowledgeable about business tax deductions, so you can play the tax game. Contact your tax professional to discuss your specific situation or, if you currently are not an Admin Books client, contact our office for a complimentary evaluation.