Imagine that you have a new client who is feeling overweight. As a personal trainer, would you have them sit in a sauna and sweat out five pounds, or teach them how to lose five pounds of fat? This is similar to the sort of advice you may receive when your business is heavy with taxes.
You have probably been given strategies for spending money/profits to increase your tax deductions - that is basically "sweating away" your high taxes. If those added expenses do not add value to your business, it is likely not a helpful strategy for you.
It could be far more helpful to take existing personal expenses that are not deductible and convert them into business tax-saving strategies. That is how an effective tax plan helps drop "fat."
Below you will learn two helpful ways to convert your expenses into business expenses.
EXPLANATION OF MEDICAL EXPENSES AND INSURANCE DEDUCTIONS YOU CAN MAKE
As a fitness entrepreneur, you can deduct 100% of your medical insurance monthly premiums. However, even though you are deducting your monthly premiums, you might be missing out on the deductions for the out of pocket costs such as doctor visits, prescriptions, contact lenses, etc.
But it’s important to know that medical expenses are only deductible once you spend 7.5% of your income on them.
For example, If your coaching business made you $200,000 in profits, you need to spend $15,000 ($200,000 x 7.5% = $15,000) on medical expenses in order to START deducting them. (If you spent $15,001, only $1 is tax deductible).
Let's say your monthly insurance cost is $500 ($6,000/year), and you spend an additional $3,000 out of pocket - doctor visits, prescriptions, co-pays, contact lenses, etc. As a business owner, that $6,000 is already deductible for you.
As a side note, if your spouse is offered a health plan through work, you lose your tax deduction for being self-employed. Assuming your spouse is not offered coverage through work, you will receive the $6,000 tax deduction, whereas the $3,000 out of pocket is NOT deductible.
In this example, because of your $200,000 income, you cannot deduct out of pocket expenses less than $15,000 (or 7.5% of your income).
OPTIONS FOR CONVERTING OUT OF POCKET EXPENSES INTO DEDUCTIONS:
1. Upgrade your medical plan.
The premiums will be deductible for you. So if you upgrade your plan to pay more per month and reduce your out of pocket expenses, you will ultimately push more of those dollars into a tax deduction. That said, I am not suggesting you pay for an expensive health plan you will not use. The goal is not to waste money, to pay less in tax!
2. Utilize a Health Savings Account (HSA).
These plans allow you to open a bank account that you can fund with pre-tax money each year. Just like using a debit card, you can use your HSA funds to pay for your out of pocket medical expenses tax-free! For 2020, an individual can put up to $3,550 ($7,100 for a family) into an HSA.
Going back to the previous example, your $3,000 is now fully deductible because you could cover the full amount directly from the HSA bank account. Like everything, there are pros and cons to HSAs.
Pros of a Health Savings Account
- Typically lower monthly premiums
- Ability to deduct first $3,550 of medical expenses ($7,100 for family)
Cons of a Health Savings Account
- High deductibles before the insurance “kicks in,” which means that a doctor visit can be costly.
You should only consider an HSA if you are in good health and can commit to contributing money to an HSA account. Otherwise, you have a very low-cost health insurance and risk thousands of dollars in medical bills if you become ill or injured.
GYM GEAR: A GREAT OPPORTUNITY FOR CONVERTING PERSONAL EXPENSES
The other simple way to convert personal expenses is your gym gear. Most of the clothing you wear to work is not deductible because yoga pants, tanks, and shorts can be worn for non-work purposes as well. For this reason, uniforms and safety equipment that are strictly for work are the most commonly permitted clothing deductions - nursing uniforms, safety construction gear, police uniforms, etc.
As you may already know, marketing and promotional merchandise is fully deductible. So, convert your everyday gym gear into fitness coaching promotional clothing. By adding your company logo to your workout clothes, you can deduct the cost. The cost of adding your personalized logo is also deductible.
**It is important to note that the IRS has strict rules associated with this option. The logo MUST be prominently displayed and visible.
These two tax strategies can help you lower your tax bill by converting non-deductible personal expenses into business tax deductions. Tax planning should focus on improving your business or own net worth rather than wasteful spending of your profits. Like you advise your clients...it is better to lose fat, not just drop water weight!
If you have any questions, please reach out to me at firstname.lastname@example.org with the subject line: NASM Tax Question. I would be happy to help you.
Disclaimer: This is meant to be educational. Tax deductions have complex rules that require documentation and reporting to legally and adequately take the deduction. This is not advice for your specific business. Please speak with a qualified tax or financial professional before making any changes to your tax deduction strategy.