I've been a CPA for nearly 20 years - serving private small business and real estate the entire time. I take the lessons learned in serving and now running a small business and share them here. For business owners, investors, and advisors looking to lower their cost of capital, subscribe for delivery straight to your inbox π Also on YouTube at PlugAccountingandTax!
Going Vertical in Your SMB πΌ - Converting Expenses to Assets
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Growing a business with acquisitions of competitors (horizontally) is additive β - increasing profit through increasing market share and sharing costs. But growing a business through acquisitions of customers or vendors (vertically) is multiplicative βοΈ - it collapses gross profit making every dollar spent on sales that much more valuable. Today, we're talking about how business owners use the tax code to do the same thing - turn expenses into assets or tax deductions and lower their overall cost of capital. 1. Own Your Real Estate Instead of Paying Someone Else's Mortgage π’Most business owners rent their office space, warehouse, or retail location. Every month, that rent check walks out the door and you'll never see it again. But here's what's really happening: you're helping your landlord build wealth while capturing none of the value created by your lease and payment. πͺ When you own the building your business operates in, you flip this equation completely. Instead of rent being a pure expense, your mortgage payments accrete the value to you. You're capturing the enterprise value your business creates, while also getting depreciation deductions that reduce your tax bill with the right elections. Bonus depreciation is just the cherry on top. Let's say your business pays $5,000 per month in rent. Over 10 years, that's $600,000 gone forever. But if you own the building, that same $5,000 might cover your mortgage payment while you build equity. Plus, you get to depreciate the building and improvements. π¦ 2. Capture the Goodwill You Create π‘Every day you work as an employee, you're building value for your employer. You develop processes, create relationships, solve problems, and generate innovations. All of that intellectual capital and goodwill gets attributed to the company, not to you. Many of you sign (or have your team sign) agreements saying as much. When you own the business, that goodwill belongs to you. More importantly, when you eventually sell the business, that goodwill gets treated as a capital gain instead of ordinary income. This means you pay a lower tax rate on all the value you've created over the years. π° The knowledge, systems, and relationships you build as a business owner become a valuable asset you can eventually monetize at preferential tax rates. As an employee, those same contributions just disappear into someone else's balance sheet. 3. The 20% Business Income Discount πThe Qualified Business Income (QBI) deduction is an incredible tax benefit, but only for business owners. This provision allows eligible business owners to deduct up to 20% of their business income before paying taxes on it - as long as they've paid enough wages (or own enough property). This is another way expenses convert to additional tax deductions π for business owners. Employees get no equivalent benefit. Their W-2 income gets taxed at full rates with no percentage discount available. There are some limitations and complexity around QBI (income thresholds, business type restrictions, etc.), but for many business owners, it represents substantial tax savings that simply aren't available through traditional employment. The Bigger PictureThe tax code is written to encourage business ownership and investment. While employees are limited to standard deductions and a few specific tax breaks, business owners have access to dozens of strategies that can significantly reduce their tax burden. The three examples above represent just the tip of the iceberg. π§ Business ownership opens doors to retirement plan contributions, equipment expensing, travel deductions, and countless other tax advantages that can add up to tens of thousands in annual savings. The key is understanding these opportunities exist and structuring your business to take advantage of them. Most business owners leave money on the table simply because they don't know what's available to them. β π«‘ π₯ Hottest Finance Posts This Week π₯β
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The Plug [Newsletter]
I've been a CPA for nearly 20 years - serving private small business and real estate the entire time. I take the lessons learned in serving and now running a small business and share them here. For business owners, investors, and advisors looking to lower their cost of capital, subscribe for delivery straight to your inbox π Also on YouTube at PlugAccountingandTax!
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