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- 5 Tax Benefits For Franchise Owners
5 Tax Benefits For Franchise Owners
Great incentives to create jobs
The government uses the tax code to create incentives.
Some significant incentives exist for entrepreneurs to create jobs.
As a business owner, it's your responsibility to learn & implement tax strategies. I don't rely on CPAs to tell me what to do. I give them an idea, and they tell me if it'll work.
Disclosure: I am not a CPA. This email is for informational purposes only. Consult a tax professional before making any financial decisions.
1) WOTC Tax Credits
The Work Opportunity Tax Credit (WOTC) is one of the best tax credits available to employers. This is a tax credit, not a deduction. Credits reduce your tax payment, deductions reduce your taxable income.
This tax credit rewards employers for hiring people in specific target groups:
Qualified Veterans & Ex-Cons
People who receive SNAP & other benefits
People who live in certain low-income regions
We use Equifax which makes the process hands-off for us.
All we do is have new employees complete a short questionnaire during the onboarding process.
Equifax takes care of all the paperwork if they qualify. Equifax is paid a percentage of the tax credits we earn.
This year we'll save over $60,000 in taxes thanks to this program.
2) Qualified Business Income Deduction
Most businesses qualify for a "QBI" deduction, which reduces your taxable income by 20%.
Let's say you earned $500k
20% comes off the top, reducing your taxable income to $400k. This saves you $35k-ish in federal taxes. The best part is there is nothing you need to do! Almost every business qualifies.
The strategy is to lower W2 wages paid to yourself to maximize the QBI deduction. There are a bunch of rules around this. Here's an article that goes into some detail. Your CPA can help you develop a strategy based on your unique situation.
3) Bonus & Accelerated Depreciation
"Depreciation" will become one of your favorite words as a business owner.
What is depreciation? The expense of an asset over its useful life.
Let's say you buy $100k worth of equipment with a useful life of 10 years. Every year, for 10 years, you can expense 10% of $100k ($10k per year).
A few years ago, they added a provision (Section 179) that allows business owners to immediately deduct the entire cost in the first year instead of spreading it out.
It doesn't matter how you pay for the asset.
You buy on 12/31/23, finance the purchase with zero dollars down, and depreciate all $100k immediately, saving you ~$35k in taxes for 2023.
The rules around bonus/accelerated depreciation change year-to-year. Consult with your CPA before buying anything.
4) Credit Card Rewards
Credit card rewards are not taxable.
You should max out your credit card usage (assuming you can pay it off every month)
Our favorite card is the Capital One Spark 2% Cash Back. This card gives us a straight 2% cash back on every purchase. You can redeem the rewards by receiving a check in your personal name.
We use it as a point of negotiation with new vendors. Just ensure the vendor isn't surcharging +3% to process, which defeats the purpose.
My wife and I went on a first-class round trip to Hawaii, 100% paid for by credit card rewards.
5) Retirement Plans
Your business can establish a qualified retirement plan for all employees who meet the criteria.
I recommend using Vanguard due to its low-cost structure. Work with them to determine which type of plan is the best for you (SIMPLE IRA, 401K, SEP, etc.)
We have a 401k with a salary match up to 4%.
I contribute the maximum annual amount of $22k (2023) from my W2, reducing my personal taxable income.
The company matches another $5k, an expense for the company, and I personally receive "tax-free."
$27k per year plus market growth compounds nicely over time.
If your spouse, kids, & parents work in the business, you max out their contributions, too.
Check out the book Tax-Free Wealth by Tom Wheelwright. He shares a ton of good ideas in there. Some will apply to you; some won't.
Ready to buy your first franchise? Book a free, no-obligation call with my team. We'll provide personalized franchise recommendations based on your goals, skills, budget & location.
Check out my podcast, Business with Beers, where I bring franchisees, franchisors, and other interesting guests to talk about buying & scaling businesses. New episodes dropping every Monday.