As business owners, you possess a unique advantage when it comes to taxes— you have the power to strategically plan both your personal and business taxes, leading to significant long-term impacts on your overall lifetime tax burden. While many focus solely on short term tax savings, the true essence of strategic tax planning lies in its ability to reduce your total lifetime taxes. It’s a shift from short-term thinking to a long-term mindset.
It is crucial for business owners to spend the time, build a team of trusted professionals, etc. to mitigate their tax liabilities. The more you save on tax, the more you can be paid and the better your business can grow.
So what are some of the best tax planning moves to consider?
Let’s dive right into them:
1. Setup a Business Retirement Account
Business retirement accounts are a great way to either pay tax today at a lower rate than you expect to be at in the future (ROTH) or to defer tax when you are in higher income earning years. My favorite accounts for this are:
- Solo 401(k) – for those that are a solo owner or just have a spouse with them
- 401(k) – for people with multiple employees
- SEP IRA – if you have just a few employees and they are lower income
Not only can this help you prepare for retirement, be strategic with taxes, etc. but it also can be a great way to incentivize your employees to stay. And right now, there are tax credits to help cover the expenses for setting up the plan.
2. Pick The Right Tax Election
Most do not understand this at all. They say they are an llc, which is not a tax status. You can be a C Corp, S Corp, Sole Prop, Partnership, etc. Getting this right can be the difference in a lot of tax savings.
Once people hit a certain revenue level, S Corps start to make a lot of sense. With an S Corp you can pay yourself a reasonable salary and be subject to self employment taxes, then the profits above that avoid self employment taxes (15.3%). This could lead to great tax savings. However, it takes more work, you have payroll, more tax filing fees, etc. so you need to do the math and not rush into this decision.
Another important one to consider here is being a C Corp. A lot of owners plan to scale and sell and want to receive QSBS (to avoid capital gains tax), but don’t realize you have to be a C Corp and be one for about 5 years pre sale. I will do a longer post on this here soon.
3. Maximize The QBI Deduction
QBI stands for qualified business income. It is simply a deduction for the self-employed as well as other small business owners. It is a tax deduction that allows eligible business owners to deduct 20% of their qualified business income or 50% of their wages on their taxes. This basically allows you to lower the amount of income tax you pay which is huge! Check out more on this from my last post and how you can maximize it. This can be a complex topic yet so impactful.
4. Hire Your Spouse or Older Kids
People overplay this one and try to hire their babies which is not the best idea. However, you can bring on your spouse or older kids and have them do different jobs you need around the business. If you hire your spouse and pay them, that is a deduction to the business but then counts as income to them. However, now they have the ability to use your retirement account at work and potentially defer the income and put more away for retirement.
Then for your kids, technically the first $13,850 of income is tax free since that is the standard deduction. This can lower your business profits and then funnel to them with very little tax depending on how much work and time they put in. Plus, they not have earned income that can be used to max out a Roth IRA early in life. Check on my podcast where we go more into this.
5. Accelerate or Defer Income
This is one not many people think about but is a great end of year tax planning move. If you have a lower income year, maybe you will have clients pay up front earlier to accelerate this income. Or maybe it’s the the opposite and this has been an abnormally good year. You could have them wait to pay you till next year where you expect income to be lower. Timing income can be huge!
6. Qualified Opportunity Zone Investing
Maybe you just sold your business and have a large capital gain this calendar year. You could consider putting some from the sale into an opportunity zone investment which will defer taxes till 2026 and then the growth will be tax free if you hold for 10 years. But remember, any opportunity zone won’t work, you still need to make sure it is a good investment. Learn more about this on one of my recent podcast episodes.
7. Donate To Charity
This is a really easy way to lower your taxable income if you have extra funds and are charitably inclined. You have donor advise funds, charitable remainder trusts, etc. that can be used to lower your taxable income. You also can donate highly appreciated securities to avoid capital gains taxes and still get a deduction. To maximize this, donate before you sell. If you don’t, you will have to pay the capital gains tax on it.
On this same note, some consider bunching charitable donations every other year to increase itemized deductions.
8. Take Advantage Of An HSA
Not all business owners have access, but when you do and are in a high income bracket, they can be a huge value add. They reduce taxable income, can be invested and grow tax free, and used tax free on future health care costs or long term care insurance premiums in the future. This is the most tax advantaged account out there. For high income earners, not using it today and letting it grow can be so impactful. But keep those receipts just incase you ever need to pull funds out.
If you do not have one, using an FSA can be great too as it will lower your taxable income. It just cannot be invested and utilized down the line. It is typically a use it or lose it benefit this year (with a small amount potentially being able to be rolled over).
9. Roth Conversions
There are times where you will invest in growing the business and have lower income years. There may also be a time where you move to one income, retire early, etc. and have lower income years. This is a great time to move pre-tax to post-tax assets by doing Roth conversions and paying tax at a lower rate then you would in the future. Tax planning is all about paying tax at lower periods of time. Another good time to consider this is when the market drops and your portfolio is lower.
10. Real Estate
I am only going to get into the basics of this today as it would be a long post just on this one topic. I promise to do it sometime in the near future and have a podcast episode coming out on this shortly as well.
Real estate is a very tax advantaged asset class. With bonus depreciation, cost segregation studies, 1031 exchanges, etc. you can reap a ton of rewards by utilizing this asset class.
If your spouse has Real estate professional status (REPS) or you take advantage of the short term rental loophole, you can actually use these losses to offset other active income. Sounds great, right? Well… it is but it is not easy to pass all the tests. Here are a couple resources to go into what those tests are. Definitely need to work with your tax professional if you want to consider this route.
11. Non-Qualified Deferred Comp Plan
Deferred comp plans are separate from your regular income and are a way to be paid more but not actually receive it or be taxed on it until a later date.
Adding a deferred comp plan could be a great move in the right situation when you have a ton of income.
This is just the start of what good tax planning looks like. Make sure to have a strong team around you so you can take advantage of the right tools for your situation.
Disclaimer: This is just for informational purposes. None of this should be seen as tax advice. Work with your financial planner and tax professional to evaluate which strategies would be the best for your situation.