Here are 3 compelling reasons why you need a business, and you can take advantage of these benefits even if it doesn’t make any money!
Reason #1: Retirement Plans
The first reason you need a small business is the retirement plans that become available to you.
Solo 401Ks: The Solo 401K is the best retirement plan that exists and is only available for small business owners. You can borrow from it at any time, you have check book control to invest in real estate. You can learn more about it in this detailed training on the subject Solo 401K Real Estate Investing. Just like everyone should have a business, everyone should have a solo 401K.
Defined Benefit Plans: This plan would be in addition to the Solo401K. It is designed for small business owners who have fallen behind on their retirement savings and need to “catch up”. It’s not as flexible as the Solo401K, but the Defined Benefit Plan is a great addition once you have maxed out your Solo 401K contributions. The best resource on this subject I’ve found is Dedication Defined Benefit Services. Their website can answer most of the questions you would have on this.
Reason #2: Pre-Tax Power
How does pre-tax power work? When you have a small business, you are able to purchase items for your business before your income taxes are calculated. They are pre-tax purchases. Let’s say you are in the 25% federal income tax bracket. Whenever you purchase something for your business, like a computer or the car you use for work, you buy it pre-tax and get a savings of around 25%. Think of your federal and state income tax rates as the amount of savings you get when you can buy something “pre-tax”.
Reason #3: Deductions
There are deductions you can take as a small business owner that don’t cost you any money, like a home office deduction. Another deduction to consider is on your vehicle. As a W2 employee you need a vehicle to get to work, but you don’t get a deduction for it. However, if you own a business, you can deduct that vehicle because it’s a tool you need for work. There are lots of ways to reduce your taxable income, separate from pre-tax expenses. And if the business makes money, you can take advantage of the Qualified Business Income Deduction, which is a 20% discount on any income.