We run a small business and took our income as small business profit (we are not on payroll). Does this not allow us to maximize our mortgage interest write off?

[keeferman72]

After depreciation of business assets profit is $67k. Mortgage interest, prop tax and insurance is $30k. Showing tax due of $8k (thought it would be less). Thanks for any help!

[MichaelL1 · Accepted solution]

Your major tax is your self-employment tax on the profit ($67K) on the business. So your home is reducing the income tax greatly however it cannot reduce the SE Tax.

The only think that will reduce that are a reduction in the net profit of the Sch C - which would be less income and/or more expenses. 

[keeferman72]

Thank you for your answer and help! Seeing as most/all of our income is Self Employment income would it be better for us tax-wise to receive income as payroll... company is a single-member LLC that is treated as a sole prop for tax purposes (disregarded entity)... but my wife does some of the actual work along with our other employees (she is a groomer and it is a dog grooming business).

[keeferman72]

To clarify... it doesn't seem like we are getting the full benefit of our mortgage/prop tax write off the way we are currently doing things...

[MichaelL1]

it will come out about the same as there will be Social Security on the wages paid then.  You may be better off leaving it like it and just make sure all the expenses are listed.  Another area to look at is the Self-Employed retirement plans as they can help greatly.

[MichaelL1]

You are getting benefit for the mortgage, but if it was a pure business loan, it would be better for tax purposes.

[keeferman72]

Thank you for your help. Looking forward to 2017, would it be better to put ourselves on payroll... instead of taking all income as profit... so for example if we paid ourselves $36,000 on payroll and the business profited $30,000 (instead of $66,000 profit)? Would this have provided better benefit with regard to the high amount of mortgage interest and property tax we pay? Or would there be benefit in additional or different ways?

[Cattlerancher]

As Michael said above, it works out the same. If you pay wages to yourself or spouse, you must still pay the 15.3% Employment tax (SE tax). The only difference is the employer (your business) pays half and half is taken out of the employees (your pay check) pay check.
 If you think your business will continue to have profits of this $67K or more (maybe much more) a year, you might look into forming an S corp. You will still need to pay yourselves a justifiable wage but you might be able to rent a portion of your home to the business. Be careful though, forming and dissolving an S corp can cost thousands and year end tax prep more costly too. Many times they are oversold.