As a business owner, you work incredibly hard to build your company and serve your customers. But complex tax codes mean there may be overlooked opportunities to potentially reduce your tax liability - money left on the table that could have stayed in your pocket. Proper tax planning is essential for business owners looking to maximize growth and true profits.
In our meetings with business owner clients, we discuss everything from little-known credits and deductions to setting up the optimal corporate structure and benefits packages to legally seek to minimize the taxes you pay.
Here are the 15 actionable tax planning strategies business owners should consider and review each year.
Read on to discover creative tax savings approaches that could pay dividends for your bottom line for years to come.
Table of Contents:
Senior Wealth Advisor Drew Allen, CFP®, CLU®, CEPA, ChFC®, RICP® and CEO David Silver CFP®, CEPA® discuss Qualified Opportunity Zones.
Qualified Opportunity Zones (QOZs) were created under the 2017 Tax Cuts and Jobs Act as a way to incentivize investment in underserved communities. Here’s how they work to potentially benefit both investors and communities:
Qualified Opportunity Zones are economically distressed areas that meet certain income and poverty thresholds. Each state governor has the ability to nominate a certain number of census tracts to become federally certified QOZs.
Those who invest capital gains into Qualified Opportunity Funds that are set up to invest in QOZ businesses and properties could receive substantial tax incentives:
**From IRS.Gov: If the investor holds the investment in the QOF for at least 10 years, the investor is eligible to elect to adjust the basis of the QOF investment to its fair market value on the date that the QOF investment is sold or exchanged.
This allows investors to potentially compound money over the long-term in low income areas that need the capital.
To receive QOZ tax incentives, taxpayers must:
*Note: As mentioned above, if held 10 years, the investor can also eliminate all capital gains taxes realized from the QOZ asset (the investor will still owe taxes on the original asset)
Opportunity Funds pool money and invest specifically in businesses, real estate deals, and other assets located within federally designated Qualified Opportunity Zones.
Senior Wealth Advisor Drew Allen, CFP®, CLU®, CEPA, ChFC®, RICP® and CEO David Silver CFP®, CEPA® share insights on Section 179 for business owners.
Section 179 allows business owners to fully deduct the purchase cost of eligible capital assets in the first year, rather than slowly depreciating deductions over several years. This could provide an immediate boost in tax savings and cash flow in the current tax year.
For example, rather than only deducting 20% depreciation on a $50,000 vehicle purchase each year for 5 years under normal depreciation, the full $50,000 could be expensed via Section 179 in Year 1.
To take the Section 179 deduction on capital expenditures, the equipment must be purchased for active business use rather than passive investment purposes. Common eligible Section 179 property includes:
There is an overall annual dollar limitation on the total Section 179 deduction available, as well as limits on deductions for specific asset types. For 2023, business owners can deduct*:
*See IRS.gov article here on Section 179
Consult an accountant to review eligible purchases and seek to maximize your Section 179 deduction under current limits.
A cash balance plan is a defined benefit retirement plan that functions similarly to a 401(k) but offers substantially higher contribution limits for business owners and key employees.
Each participant receives an annual pay credit contribution from the employer (based on salary and age) which grows over time with interest credits.
This allows older business owners to potentially save exponentially more for retirement in tax-advantaged accounts than 401(k)s and IRAs permit – over $300,000 per year in some cases.
Cash balance plans provide major tax deductions and a fixed rate of return on contributions. Differentiators include:
A cash balance plan paired with a 401(k) can allow business owners over age 50 to put away over $400,000 annually in tax-deductible retirement savings.
Does a cash balance plan strategy make sense for you and your unique situation? We recommend consulting a financial advisor to help you sort through the different options available to you.
Tax-loss harvesting is the strategic selling of investments, such as stocks or mutual funds, at a loss to offset capital gains taxes.
By realizing losses, this reduces tax liability on any gains realized elsewhere in a portfolio. The sold security can then be repurchased after 30 days if still desired.
Savvy investors utilize tax-loss harvesting to help save significantly on their tax bills. Potential benefits include:
Over long time horizons, this could add up to major tax savings.
Be aware of “wash sale rules” that disallow claiming a tax loss if buying back substantially identical securities within 30 days of selling.
Tax-loss harvesting takes careful planning and timing but could be an excellent tax reduction tool.
Employing your children in a family business or paying them for work as an independent contractor could provide worthwhile income for them as well as tax deductions for your business. But special rules and limits apply, so proper planning is key.
Document hours worked and responsibilities to demonstrate evidence in case of any legal challenge.
As long as legitimate pay requirements are met, potential benefits include:
However, pay must remain reasonable compared to duties and meet IRS standards. Excessive pay can result in partial or total loss of deductions plus penalties.
We recommend consulting a tax professional to ensure you remain compliant while benefiting your family and business.
The Augusta Rule, known in the tax code as Section 280A, allows homeowners to rent out their primary residence to their own business for up to 14 days per year without needing to claim the rental income personally.
So for example, a business owner could:
This essentially allows business owners to get a deduction through their company for the use of their home, while also letting them receive that rental income tax-free individually by keeping it under 14 days per year.
Section 280A provides a commonly overlooked deduction opportunity. Business owners simply need to ensure the home rental stays within 14 days annually for business meetings, parties, planning sessions etc to take advantage tax-free.
Retirement plans like 401(k)s and pensions provide major tax savings for business owners. But laws change, plans evolve, and opportunities arise to contribute more. That’s why ongoing reviews are critical.
Annual qualified plan reviews help uncover:
Significant tax and retirement savings can be gained from ongoing plan optimization and funding adjustments.
Work closely with your financial advisor or accountant to analyze your current qualified retirement plans. Strategies may include:
The time invested in an annual review could lead to maximized savings for both the company and your future self. Don’t leave these crucial tax-advantaged investment vehicles running on auto-pilot.
Cost segregation is an often overlooked tax strategy for real estate investors and business property owners that can generate major depreciation deductions.
Cost segregation is an IRS approved method of reclassifying components of a commercial property into shorter depreciable life categories. This accelerates tax deductions compared to traditional straight-line depreciation.
For example, parts of a building like wiring, plumbing, and HVAC systems can get bumped from a 39 year schedule to 5-7 years. This essentially pulls forward deductions into earlier years.
Owners who utilize cost segregation could enjoy major benefits including:
This all could lead to substantial tax savings and increased cash flow in the early years of a property investment. A commercial real estate CPA can assess if cost segregation makes sense for your property. Proper implementation can yield hundreds of thousands in tax savings.
Many businesses are eligible for substantial tax credits related to research and development activities without realizing it.
Contrary to what many believe, R&D tax credits don’t just apply to formal scientific or medical research. Eligible activities include:
Essentially, exploring uncertainty in attempts to develop improved products, processes, performance, reliability, or quality can qualify.
While rules can be complex to fully maximize claims, the four basic steps are:
Most companies are performing many more eligible activities than they realize. A tax professional who specializes in R&Ds can assess qualifications and file your R&D tax credit.
The reward for this under-the-radar incentive could potentially equate to hundreds of thousands back to reinvest and grow your business.
Reviewing your entire savings strategy annually provides huge potentially opportunities to better position assets in more tax-advantaged accounts or investments.
A proper review analyzes:
This allows refinement and improvement for amplified growth.
After thorough analysis, recommendations may include:
Work with a savvy financial advisor to regularly review strategies and determine if any revisions or tweaks need to be made.
When used strategically, Health Savings Accounts offer a triple tax advantage. Yet most Americans with access don’t maximize them.
HSAs offer unique benefits including:
Funds roll over year after year for future health costs. After age 65, money can get withdrawn for any purpose with just ordinary tax owed.
Consider strategies like:
Be sure to save all medical receipts. When strategically leveraged, HSAs could contribute significantly in growing long-term wealth.
Strategically planning charitable gifting allows potentially maximizing tax deductions while furthering your philanthropic impact.
Items to evaluate with an advisor include:
Additional avenues to explore include:
There are many ways to give. Depending on your situation, you may have options that are more tax-efficient and should be considered to accomplish your charitable goals.
While tax software and trying to optimize deductions on your own can work for simple tax situations, most business owners need professional guidance to help maximize savings.
An experienced CPA can provide:
Even basic planning like expense categorization can be optimized by a professional.
You probably have your own preferences for working relationships, but we recommend looking for a responsive CPA who:
Investing in a CPA could yield dividends through maximized deductions, avoided penalties, and significant time savings. Make sure to run an annual tax planning meeting involving your financial advisor to help ensure continuity in your strategy.
An employee benefits package consists of various non-wage compensations companies offer to retain top talent. Structuring these creatively presents potential tax optimization opportunities.
Typical benefits may encompass:
Providing competitive benefits can reduce turnover. Optimizing them can create recruitment advantages and tax savings.
Analyze your current offerings and structure considering:
Understanding Mega Backdoor Roth Conversions
The Mega Backdoor Roth Conversion allows high-income earning employees to contribute well beyond typical 401(k) limits into a Roth account with tax-free growth potential.
A Mega Backdoor Roth involves making non-Roth after-tax contributions to a 401(k) plan up to $61,000 annually. These after-tax dollars can then get rolled over into a Roth IRA annually.
This provides a way to get up to $41,000 more into tax-advantaged Roth accounts per year than the standard $20,500 pre-tax 401(k) limits.
The process involves:
This advanced strategy requires employer plan allowance but allows potentially amplifying Roth retirement savings significantly.
Consultation with a knowledgeable financial planner is key for successful implementation and potentially maximizing contributions. When leveraged fully over decades, the Mega Backdoor Roth could unlock enormous tax-free growth potential for retirement.
Implementing comprehensive business tax minimization strategies requires advanced planning, but the long-term savings can be substantial.
With constantly evolving regulations and ambiguity in complex tax code applications, one-time planning is not enough. Work closely with both expert CPAs and financial advisors to analyze savings opportunities in an ongoing, comprehensive fashion.
Being proactive allows responding to regulatory changes with continuity in optimized overall tax reduction approach year after year. An annual review also uncovers easy-to-implement savings strategies hiding in plain sight.
Have a question about your specific situation or want to talk to one of our team members here at Instrumental Wealth? Schedule a meeting here.
We look forward to speaking with you!
Not an Offer: This document does not constitute advice or a recommendation or offer to sell or a solicitation to deal in any security or financial product. It is provided for information purposes only and on the understanding that the recipient has sufficient knowledge and experience to be able to understand and make their own evaluation of the proposals and services described herein, any risks associated therewith and any related legal, tax, accounting or other material considerations. To the extent that the reader has any questions regarding the applicability of any specific issue discussed above to their specific portfolio or situation, prospective investors are encouraged to contact Instrumental Wealth or consult with the professional advisor of their choosing.