The tax code is built for business owners. Business owners can strategically plan both their personal and business taxes, resulting in a unique advantage. The goal of tax planning is to lower your tax bill over your lifetime, not just this year. It’s about thinking long-term rather than short-term. More tax savings leads to more compensation and better business growth.
Let’s discuss 11 tax planning moves for business owners.
1) Business expenses:
- Business income opens an opportunity that W-2 employees don't have - business expenses. Of course, direct costs incurred are deductible, but there are expenses you already have. Creating business income unlocks pre-tax purchasing power.
- Most employees have a home office they can't deduct. As a business owner, you can deduct phone bills, dues, travel, education, and legal fees that would be spent regardless.
- The other deduction opportunity is business use of your personal assets including the business use of your car and home.
2) Get a retirement account in place:
- Opportunity to defer and deduct tax or build a tax-free bucket of money.
- Solo 401(k) for solo owners.
- SEP IRA if there are only a few employees.
- SIMPLE IRA for small businesses that don’t want 401(k) expenses.
- 401(k) for multiple employees/larger businesses.
- There are tax credits available to cover some or all expenses associated with plan set up.
3) Selecting the right tax election:
- Can be an S corporation, C corporation, Sole proprietor, Partnership, etc.
- Employment taxes are 15.3% which can be saved by opening an S-corporation and paying yourself a reasonable salary. You can bifurcate your employment from your ownership and pay yourself a reasonable salary, often saving thousands in employment taxes.
- See the following article for more details on different tax elections: What entity type should I choose for my business? - Ryan Johnson | Ameriprise Financial (ameripriseadvisors.com)
4) Accelerate or defer income:
- Very good year-end tax planning move.
- Lower income year? Have clients pay up front or earlier to accelerate income.
- Higher income year? Have clients wait to pay until next year when income is lower.
5) Qualified Business Income (QBI) Deduction:
- Deduction for the small business owners.
- It allows eligible business owners to deduct 20% of their qualified business income or 50% of wages leading to significant tax savings.
6) Hire spouse or kids:
- Hiring your spouse and paying them is a deduction to the business. It also counts as income to them. But then they can set up a retirement account to potentially defer income and put away extra for retirement.
- Hiring your kids can lower taxable business profits and provide very minimal taxable income to them depending on how much they are paid, and hours worked. Additionally, then they have earned income and can make Roth IRA contributions in their name.
7) Qualified Opportunity Zone Investment:
- If you sold your business this year and want to defer a large capital gain, you could consider putting some of the sales proceeds in an opportunity zone investment and defer taxes until 2026. Growth will also be tax free if you hold for 10 years or more.
8) Charitable Donations:
- Utilizing donor advised funds, charitable lead or remainder trusts, charitable gift annuities, or others to lower taxable income.
- Bunching charitable donations into one year.
- Donating appreciated stock to avoid capital gains tax.
- See the following article for more details on these strategies: Charitable gifting strategies - Ryan Johnson | Ameriprise Financial(ameripriseadvisors.com)
9) Roth Conversions:
- Roth conversions allow you to pay the tax on IRA distributions now. Once converted, you enjoy tax free growth and are never subject to RMDs.
- See the following article for more details on Roth conversions: Roth Conversions - Ryan Johnson |Ameriprise Financial (ameripriseadvisors.com)
10) Health savings account (if you’re in a high deductible health plan):
- Contributions go in pre-income and pre-FICA tax (extra 7.65%). Distributions used for medical expenses are tax free as well.
- You can re-imburse yourself for medical expenses paid out of pocket at any time while continuing to let the HSA grow tax free if it’s invested.
11) Owning Real Estate:
- Real estate is a highly tax advantaged asset class.
- You could potentially have the following benefits available to you: bonus depreciation, cost segregation studies, 1031 exchanges, etc.
- Owning real estate directly in your business allows the expenses to be deductible and/or qualify for 199A (Qualified Business Income Deduction).
Together, we can work to keep you on-track towards your financial goals.
Request a consultation with me to learn more.
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