Tax planning is an essential aspect of managing a business, as it can significantly impact your bottom line. Advisors who take the time to understand and implement effective tax strategies for their business owner clients better position those clients to manage their tax burden and better position their profits. Prudent advisors aren’t scrambling at the end of the year trying to come up with tips and tricks to bring their clients’ liability down; there’s been a plan in place working all along.
In this article, we will explore various tax strategies tailored specifically for business owners, designed to help you understand and strive to optimize your tax situation or know what to look for in your own plan. By implementing these techniques, you can seek to ensure that your business operates as tax-efficiently as possible while remaining in full compliance with the law.
So, let’s dive in and discover how to control your tax burden and keep more of your hard-earned money in your pocket.
1. Choose the Right Business Structure
The legal structure of your business has a direct impact on your tax liability. Business entities such as sole proprietorships, partnerships, limited liability companies (LLCs), and corporations each have their own tax implications. It’s essential to choose the structure that best suits your specific needs and offers the most favorable tax treatment. Consult with a tax professional to determine which structure is most suitable for your business.
2. Implement Retirement Savings Plans
Establishing retirement savings plans for yourself and your employees can provide significant tax advantages. Contributions to qualified plans, such as 401(k)s, Simplified Employee Pension (SEP) plans, or Savings Incentive Match Plan for Employees (SIMPLE) IRAs, are tax-deductible, reducing your taxable income. Additionally, earnings within these plans grow tax-deferred, providing long-term tax benefits.
If you have not established a retirement plan, this would be the time to do so, as any contributions made this year can be deducted from your gross income. The Secure Act 2.0 included the Starter 401(k) provision reducing or eliminating many administrative and cost obstacles that made it difficult for small businesses to offer a workplace retirement plan.
The Secure Act 2.0 also increased the business credit available to small businesses with up to 50 employees for starting a new retirement plan to 100% of administrative costs (up from 50%) up to $5,000 for the first three years.
It would be important to understand the contribution timing requirements because some retirement plans require contributions to be made by October.
3. Leverage Deductions and Tax Credits
Managing deductions and tax credits can significantly reduce your taxable income. As a business owner, you’re eligible for a wide range of deductions, including:
- Business expenses: Deduct expenses that are necessary and ordinary for your business operations, such as rent, utilities, advertising, and employee salaries.
- Home office deductions: If you use part of your home for your business, you may be eligible for a home office deduction.
- Depreciation: Deduct the cost of business assets, such as vehicles, equipment, and machinery, over their useful life.
- Research and development (R&D) tax credit: If your business engages in R&D activities, you may be eligible for a tax credit to offset some of these costs.
4. Utilize Tax-Loss Harvesting
If you own investments within your business, consider tax-loss harvesting as a strategy to better position capital gains taxes. This approach involves selling underperforming investments to offset gains from other investments, thereby reducing your overall tax liability. That’s right, selling at a loss can actually save you money. It might seem like a contradiction, especially if your portfolio is still young. But, if appropriate for your situation, rest assured, it’s a tried and true method.
Pro Tip: Don’t wait until the very end of the year to begin, as it may simply be too late to put this strategy to work.
5. Defer Year-End Income
If your business uses the cash method of accounting as a sole proprietor, S-Corp, or partnership, it’s possible to defer income into the next year to save on current taxes. This could be accomplished by delaying invoices, so payments are not received until 2024. However, this is not advisable if you anticipate that your tax rate will increase in 2024. Work with your tax advisor to see how to accomplish this without throwing your books out of whack.
6. Accelerate Deductions
If you anticipate purchasing supplies or inventory early next year, you can capture the business deduction for 2023 by making the purchases in December. You could also prepay your January utilities or rent in December for current deductions.
7. Take Advantage of the Section 179 Deduction
If you are planning any significant equipment purchases, such as a new computer, a company car, or machinery, accelerate the purchase into the current year to take full advantage of the Section 179 depreciation allowance that allows for accelerated depreciation and a deduction of the total purchase price in the current year.
8. Income Shifting
Income shifting involves transferring income from high-rate taxpayers to lower-rate taxpayers within your business. For example, you may pay a reasonable salary to a family member working in your business, effectively shifting income to them and potentially lowering your overall tax liability. Specific rules do apply. Please seek advice from a qualified tax advisor for more information.
9. Donate Inventory to Charity
A better option for your excess inventory may be to donate it to charity. A deduction for the fair market value can be taken, resulting in more cash flow through tax savings than if the item were sold at a salvage price or simply junked.
Ready to Put a Tax Strategy in Place Before the Next Tax Bill Arrives?
Effective tax planning is crucial for business owners seeking to manage their tax burden and strive to optimize their financial performance. By understanding and implementing these strategies, you can aim to ensure your business operates tax-efficiently while remaining compliant with the law.
Ready to put a tax strategy in place… before the next tax bill arrives? A member of our team is waiting for your call.