By nate
•
August 24, 2023
We all know " That Guy :" the sole proprietor or tiny-business owner who had a good year or three and is now driving around in a 50-, 60-, or 90-thousand dollar pickup. This isn't a "work truck" in the traditional sense: this truck has a luxury interior, fancy rims, never a scratch on it... and commercial plates. Maybe there's a dash-mounted bracket for a laptop computer, or a tool or small piece of equipment somewhere in the bed, but let's face it: these could easily fit in a Kia Soul . "It's a work expense!" That Guy says with a laugh. "A write-off! If I didn't spend it, the government would just take it in taxes!" You get the idea. That Guy spends a fortune on an unnecessary, over-priced, inefficient four-wheel drive ego boost. As I said, we all know a That Guy . Here's the deal: Whether a company is structured as an LLC, S-Corp, DBA, etc, it's true that earned income left over after business expenses will be taxed. It's income! And yes, spending available money on a work vehicle (or tools, equipment, advertising, etc) will reduce the company's earned income, thereby reducing the taxes as well. But isn't there something... I don't know.... smarter that can be done with available money to help reduce taxes? You know, something that won't represent the financial liability of an unnecessary luxury vehicle ? Enter the Simplified Employee Pension plan ( SEP IRA , for short). Like a traditional IRA, it's a way to set aside pre-tax dollars for retirement, while reducing the calculated taxable income this year. And unlike a traditional IRA (whose annual contribution limits for 2023 is a mere $6500), a SEP IRA can absorb up to a whopping $66,000 - or up to 25% of compensation - each year. (Note that or reasons involving funny tax math, owners/sole proprietors can "only" contribute up to 20% of their income.. still a lot more than a traditional or Roth IRA!) There are some catches: if employees exist, then the plan needs to contribute to their SEP IRAs in the same percentage that is contributed to the owner's. For this reason, I see the SEP IRA as a potent tool of particular interest to sole proprietors and small mom-and-pop companies (such as Outside Cleaners LLC), where employees are family members . There's more: for small business owners living in the Great State of Massachusetts who would like to qualify for very affordable subsidized health care, this SEP tool can be used to knock down your calculated income enough to qualify for subsidized income . That's right: if you plan it right, you can shovel money into your retirement each year while also continuing to qualify for heavily subsidized health insurance. Sooooo... that's why I live like a pauper. My sales truck, which I bough for $10k before the pandemic, has 265,000 miles on it. And while That Guy is dumping eye-watering amounts of money into auto insurance and excise taxes and monthly payments ("It's a business expense!") for his ridiculous ego truck, I'm putting the same money into our retirements. Maybe I'm the only one who care about this stuff. Maybe I'm wrong to hang my hat on the long-term growth of the stock and bond markets. Maybe the western financial system will implode, my retirement will go to $0, and That Guy will have the last laugh while he rolls onto the beach in his ego-mobile. Time will tell.