If you’re a business owner or entrepreneur, you may be curious about potential tax-saving opportunities.
Here are some of the top tax strategies that business owners may consider using to reduce their overall tax burden.
1. Choose the Right Business Structure
Your business structure will determine how much tax you’ll owe, how your personal assets are protected, and how you pay your taxes.
For example, a limited liability company (LLC) offers personal liability protection, which shields your personal assets, while an S corporation (S-corp) helps business owners avoid double taxation. Speak to your accountant about the right business structure for your business.
2. Maximize Retirement Savings Plans
High-income earners have unique opportunities to optimize retirement savings and minimize taxes.
While direct contributions to a Roth IRA may be restricted due to income limits, you can explore strategies like a backdoor Roth IRA to potentially enjoy tax-free growth and withdrawals in retirement.
Additionally, consider high-impact options such as cash balance plans or defined benefit plans, which allow for significantly larger tax-deferred contributions compared to traditional 401(k)s or IRAs.
Working with a business financial advisor can help you tailor a plan that reduces your current tax burden while maximizing long-term growth.
3. Leverage Available Tax Credits
Tax credits can reduce the income tax you owe to the state or federal governments.
Credits for businesses include the employee retention credit and work opportunity tax credit.
Keep in mind that tax credits have specific limitations and requirements. Work with a good accountant to ensure you’re maximizing your tax credits and minimizing your tax liability.
4. Make the Most of Tax Deductions
Claim all the tax deductions relevant to your business to help lower your income tax bills.
Common tax deductions include business insurance, charitable contributions, office supplies, business meals, and travel expenses.
It’s important to note that if you’re a business owner with a high income, you may face limitations on deductions. Working with a financial advisor is important if you want to minimize your tax liability. A financial advisor can review your taxes. They’ll aim to ensure you’re not missing out on any potential tax savings.
5. Defer or Accelerate Income Strategically
You may be able to minimize your tax liabilities by deferring expenses that can reduce your taxable income in the future.
Another option is accelerating your expenses to make prepayment for business expenses, which lowers your taxable income for the current year.
Choosing the right option will depend on current and predicted changes in tax rates and expected profits.
6. Explore the Qualified Business Income (QBI) Deduction
The QBI Deduction is for eligible business owners and self-employed individuals.
There are strict requirements for qualifying for this deduction. According to the IRS website, “many owners of sole proprietorships, partnerships, S corporations and some trusts and estates may be eligible for a qualified business income (QBI) deduction.”
QBI also excludes capital gains or losses and dividends.
The benefit of this deduction is that qualified entities can deduct up to 20% of QBI (Qualified Business Income). They can also deduct up to 20% of REIT dividends and PTP income. For details please review the IRS website. Determine if you are qualified by reviewing Form 8995-A or Form 8995.
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7. Utilize Equipment and Real Estate Deductions
In some cases, equipment and real estate deductions can be made, especially if you’re self-employed and using home office equipment or working from a rental unit.
Both the ordinary and necessary expenses for maintaining the rental property may be deductible, including insurance, taxes, and any upkeep needed to keep your home office in good condition.
8. Be Proactive About Depreciation
Business assets like computers and other office equipment can have natural wear and tear over time (depreciation).
If you want to spread the cost of business assets over time, correctly calculating depreciation is crucial.
9. Tax Advantage of Health Insurance Deductions
Businesses that offer health insurance for their employees can generally write it off as a business expense.
Common tax-deductible plans in the US include health savings account (HSA) contributions, group health insurance premium payments, and health reimbursement arrangement contributions.
For more information on the small business health care tax credit visit the IRS website’s Small Business Health Care Tax Credit: Questions and Answers page.
10. Consult Your Accountant about Changing Your Tax Status
If you own a limited liability company (LLC), you can choose how your business is taxed.
For example, you can use Form 8832 to switch to being taxed as a C-Corp or as a partnership. Each option has pros and cons, so it's important to consult your accountant and financial advisor to decide what’s best for your business.
11. Plan for Year-Round Tax Responsibilities
Thinking about taxes year-round can help your business minimize tax liabilities, leverage tax credits, and optimize cash flow.
You can do this by making strategic deductions and credits and meeting tax payment deadlines.
12. Review and Optimize Your Business Classification
There are several federal business classifications, and each has restrictions on how the business is taxed.
For example, sole proprietorships avoid double taxation but are subject to self-employment tax. On the other hand, C corporations pay corporate income tax, and shareholders are also taxed at their individual income rates.
The US Small Business Administration website has a great page that covers this topic in depth. But here is a brief overview of the structure and tax options available for each type of business classification.
Sole Proprietorship
Ownership: One person
Liability: Unlimited personal liability
Taxes: Self-employment tax, Personal tax
Partnerships
Ownership: Two or more people
Liability: Unlimited personal liability (unless structured as a limited partnership)
Taxes: Self-employment tax (except for limited partners), Personal tax
Limited Liability Company (LLC)
Ownership: One or more people
Liability: Owners are not personally liable
Taxes: Self-employment tax, Personal tax or Corporate tax
Corporation - C Corp
Ownership: One or more people
Liability: Owners are not personally liable
Taxes: Corporate tax
Corporation - S Corp
Ownership:
100 people or fewer
Includes certain trusts and estates
Excludes partnerships, corporations, or non-resident aliens
Liability: Owners are not personally liable
Taxes: Personal tax
Corporation - Benefit Corporation
Ownership: One or more people
Liability: Owners are not personally liable
Taxes: Corporate tax
Corporation - Nonprofit
Ownership: One or more people
Liability: Owners are not personally liable
Taxes: Typically exempt from income tax (subject to qualifying conditions)
13. Track and Organize Receipts Effectively
For a smoother tax filing process, ensure you track and organize receipts during the year.
For example, you can organize them as soon as you receive them and use folders or binders to separate business expenses from expense receipts and office supplies.
14. Understand Remote Employee Tax Implications
If you decide to employ a remote employee (one who doesn’t work in the state where you and the business are located), your taxes can get complicated.
Tax laws and regulations vary in each US state, and if you employ remote workers outside of the US, you will have to have a local business presence before hiring remote workers.
Speak to your accountant about the tax implications of hiring remote employees.
15. Utilize Home Office Deductions
If you or your employees operate within a hybrid or even fully remote working schedule, consider utilizing home office deductions.
Certain expenses that can be deducted from a home office include utilities, insurance, mortgage interest, and rent.
16. Reduce Employee Turnover While Minimizing Tax
In the US, the costs of employee turnover can be high.
Consider strategies to help your business retain employees and save on taxes. This may include offering fringe benefits that are generally deductible to employers. You could save on taxes and keep your employees happy.
Some options include:
Health and Wellness Benefits
Retirement Plans
Education Assistance Programs
Equity or Profit-Sharing Programs
Professional Development Opportunities
Childcare Assistance
Is Your Financial Advisor Helping You with Tax Planning?
Tax planning can be complex, especially if you want to lower your tax burden.
A tax professional can help you navigate common tax planning strategies to get the most out of your financial situation. When doing your tax planning, you should work with an accountant and a financial advisor.
An experienced financial advisor does more than manage investments—they can also play a critical role in optimizing your tax planning strategies. From identifying tax-saving opportunities to navigating complex regulations, the right advisor seeks to ensure that your financial decisions align with your short-term goals and long-term wealth-building objectives.
By working with an experienced advisor, you may be able to reduce your tax burden while staying compliant, freeing you to focus on growing your business.
Benefits of Working with a Business Financial Advisor
Partnering with a business financial advisor who offers tailored solutions to help you manage the unique financial challenges of running a business may be a smart move.
Whether you’re an established business owner or a self-employed entrepreneur, a financial advisor can provide the tools and strategies to help you pursue your financial goals, plan your retirement, and do your estate planning properly.
Whether you’re an established business owner or a self-employed entrepreneur, some of the benefits of working with a business financial advisor include:
Business owner cash flow planning
Tax strategies
Risk management
Income planning
Investment management
Final Thoughts
Tax planning is an essential part of running a successful business and ensuring long-term financial health.
By leveraging smart tax-planning strategies, business owners can reduce their tax liabilities, improve cash flow, and reinvest savings into growth opportunities.
However, tax laws and regulations are complex and constantly evolving, so it’s crucial to work closely with a knowledgeable accountant and financial advisor.
Their guidance can help you make informed decisions, stay compliant, and maximize your financial potential.
Important Note about Roth IRAs
A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.
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