What are tax shelters and how do they work?
Whether you are an individual or a business, taxes are a part of life. But, as much as everyone understood their importance, allocating a considerable percentage of your annual income to them can become an inconvenience, especially if you don’t make a lot of money. If the average homeowner can still live a comfortable lifestyle without feeling overburdened by taxes, small businesses have a much harder time coping with the responsibility of taxes, simply because they reach higher amounts. When you’re just setting sails and you don’t have a well-established customer base, taxes do make a difference, so one of the things you should consider are tax shelters. Not to be confused to tax evasion, tax shelters are legal methods that defer you or your business. These are several cases that qualify you for tax shelter:
If you own commercial property and you don’t necessarily want to sell it, but exchange it for something similar, 1031 is a great option. The process allows you to exchange one property with another or you can even exchange several smaller properties with a larger one. Apart from the obvious benefit that this form of like kind exchange real estate gives you more flexibility and allows you to easily find profitable solutions, it also works as a tax shelter. So, you will no longer have to pay capital gain taxes.
Municipal bonds are another way to pay less taxes. These are projects initiated by local authorities with a view to improving the infrastructure and repairing damage to public places. Any interest you earn after participating in a municipal bond will not be taxed, so all the more reason for you to try them. One of the main reasons why interest from municipal bonds is not taxable is because local governments want to encourage small businesses to become involved in public projects.
Investing in real estate
No matter the economic climate, real estate investments seem to work. As long as you understand your local real estate market and know how to choose a property wisely, you can expect great profit. If that alone does not motivate you, then you should know that real estate investors benefit from certain deductions when paying their taxes.
How to approach tax shelters
As beneficial as they might be, tax shelters are not an easy topic to discuss and almost always require the assistance of a professional accountant. One of the biggest problems with them is that they should not be abused, otherwise you risk having issues with the IRA. Even if you are an honest and transparent business owner, you should still get in touch with an accountant to make sure you benefit from every tax shelter you can. Unfortunately, many small businesses pay huge amounts of money on taxes, without knowing that they are eligible for deductions and even exemptions.