You know you’ve found the right accountant for your law firm’s taxes when they advise you about these tax deductions that actually benefit your business.
We’ve talked about necessary expenses when it comes to calculating your firm’s profits. You know your tax write-offs are good when they can technically be classified as necessary expenses because of their tangible contribution to your firm’s operations and continued success, or the real help you give to others.
Business Overhead Expense Insurance
Something that is a great benefit for your business and is a complete tax write-off is Business Overhead Expense Insurance, often referred to as BOE. BOE is great for small businesses because it is an insurance that will pay out to cover your overhead expenses, including salaries if you are temporarily disabled and unable to work. My insurance agent calls this a “key man policy.” Though we can call it a key woman policy since you are your business’s “key woman!” As the head of your small business, your business depends on you to keep it running efficiently.
If you were disabled for a period of time and you are the major player, your entire business could collapse around you. You wouldn’t be able to make payroll, pay your rent, electricity, and more. The BOE allows you to keep your business afloat even if your income takes a huge hit. The last thing that you would want is to have something happen that would make you lose everything. I know that it seems unlikely that this could ever happen to you, but it could.
I rarely talk about this, but when I was 23 years old, one week after being sworn into the bar, I was severely injured in a car accident. I could barely walk and was in incapacitating pain for 6 months. After that, I suffered from chronic pain for years until my doctors realized I had a very rare disorder caused by my accident. I had a surgery to remove muscles in my neck and shoulder and that left me out of work for three additional months.
That experience shaped my life forever. Those first six months sitting on my couch unable to work, in excruciating pain, and completely depressed that I worked so hard to become a lawyer and couldn’t even keep the job that I worked so hard to get, were some of the worst of my life. My car accident was tiny, but my injury was huge. And these things happen all the time.
Since I am acutely aware of the havoc that not working for six months will wreak on my finances, I want to make sure that I never have a setback like that again. And I don’t want it for you either! So get BOE. This insurance has the double benefit of protecting you in case something terrible happens, and it is another write-off for your taxes. The amount of your premium is fully tax deductible. Your premium is usually decided by the amount of coverage you need, which can be determined by your P&L’s and input from your CPA, or you can try to figure out a number yourself. Talk to an insurance agent about how to get this set up for you. It’s something that I didn’t know about back then but I’m glad to know about it now, and I want to be sure that you look into it as well.
I use New York Life—in case you don’t want to have to look for who offers it, that’s an easy suggestion for you. Or you can just Google around.
By contributing to your retirement accounts, you will be able to increase your tax deductions. I am extremely skeptical of the stock market and I didn’t want to take the “traditional” investment route for a long time, but I finally came around. Having retirement benefits for your staff is something that is setting them up to have a great life in the future. They are working hard for you now and you hope that one day they will be able to have a great life when they hit retirement age.
I have been reading a lot about personal finance and I am definitely more sold on the idea of retirement accounts for a myriad of reasons, including the fact that our generation is going to live longer than any other generation before us, so we have to be prepared. Social security might end, and no matter how you want to plan for retirement, you don’t want to place all your eggs in one basket. For example, I wanted to have just my rental properties and keep investing that way. But I realized I needed to diversify. My retirement accounts are just one more way to diversify my retirement plans.
And then there’s the extra tax benefit to it too. I was skeptical about that because it isn’t like if you contribute $10k to retirement accounts that you then get a $10k discount on your taxes. For a while, I felt that if it wasn’t dollar for dollar, it wasn’t worth it. But it turns out that it is worth it for all of the reasons mentioned above, plus you get to reduce your taxable income, meaning you save some money on taxes. It’s a win-win!
After you have maxed out all that you can in your retirement accounts and all of your other deductions if you still have money to spare you can try to increase your charitable contributions. As with everything tax-related, there is a lot to consider here and this should all be discussed with a tax professional. However, what you need to know is that the amount that you can deduct is maxed at a percentage on your Adjusted Gross Income.
Your Adjusted Gross Income is a calculation that your CPA can do for you, but in sum, you add up your reported income statements for the year along with other sources of taxable income, and then subtract the applicable deductions and payments. That’s your adjusted gross income. This is important to know because your taxes and what you have to pay are all based on this number.
I did not know what any of this was. I vaguely remembered hearing the concepts before in tax law class and in an accounting class in undergrad, but I had no idea what it meant and how it affected me until recently when my CPA explained it to me. I highly recommend that in your quarterly meetings you have your CPA explain the AGI to you in detail, because this number matters a lot.
It also matters when it comes to your charitable contributions. The maximum amount you can deduct from your taxes is a percentage of your AGI. The more income that you earn the more that this matters because you will want ways to pay less in taxes, and one way to do that is to help those in need.
One of my goals is to get to the point where I am maximizing this deduction 100%, which means that I will be earning enough to live comfortably while also really being able to make a difference in the lives of others.
If you can believe it, I have even more knowledge to share on this topic! If you’d like to learn more about beneficial tax deductions, sign up for my Six Figure Solo program! Six Figure Solo now comes in three tiers – Executive, Solopreneur, and CEO. Sign up here!