As a business owner, navigating the complex landscape of tax regulations is critical for optimizing your financial outcomes, but can oftentimes feel overwhelming and challenging to implement. It’s important to understand that you possess a unique advantage when it comes to taxes — you have the power to strategically plan both your personal and business taxes, which can provide a significant impact to your long-term plan.

Strategic tax planning not only helps in minimizing tax liabilities, but also ensures that you make the most of available incentives. What are some of the best tax planning moves to consider? Let’s dive right in and explore 9 tax planning moves that business owners should consider to enhance their financial well-being.

1. Optimize Business Structure

Picking the correct entity structure can be one of the more complicated decisions you might run into. This decision is going to be unique for everyone, so working with your professional team of advisors can help you evaluate your business structure to ensure it aligns with your financial goals. Depending on your situation, it might be beneficial to operate as a sole proprietorship, partnership, LLC, S corporation, or C corporation.

2. Maximize Retirement Contributions:

Having the ability to contribute to tax-advantaged retirement accounts serves as a valuable financial tool that can help optimize your tax strategy and assist in planning for your future financial goals.

There are a variety of options that can be used for different business structures. The top options include:

• Solo 401(k): Ideal for sole proprietors or business owners with a spouse as the only employee. The Solo 401(k) provides a tax-efficient avenue to save for retirement while maintaining control over contributions and investment decisions.
• 401(k): Suited for businesses with multiple employees, the traditional 401(k) plan offers a versatile platform for both employers and employees to contribute towards retirement savings. Deferring income while reducing net profit from the business via the employer match both serve to reduce your tax burden overall.
• SEP IRA (Simplified Employee Pension Individual Retirement Account): A practical choice for businesses with few employees, particularly those with lower incomes. The SEP IRA allows for straightforward contributions while accommodating the retirement needs of all eligible employees.

It’s important to highlight that there are existing tax credits designed to support businesses in meeting the costs related to the establishment of these retirement plans. These incentives serve to emphasize the benefits of integrating retirement accounts into a holistic financial strategy, providing advantages for both business owners and their employees.

3. Implement Employee Benefit Programs

Introducing employee benefit programs goes beyond enhancing the overall compensation package; it can be a cornerstone of a business’s tax-efficient strategy. Two significant avenues for achieving both employee satisfaction and tax advantages are Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs).

Health Savings Accounts (HSAs): By offering HSAs, businesses provide employees with a tax-advantaged way to save for qualified medical expenses. Employees can contribute pre-tax dollars into their HSAs, reducing their taxable income. Employers may also contribute to these accounts, fostering a sense of financial well-being among employees. Furthermore, funds in HSAs can be invested, allowing for potential growth over time. The combination of tax advantages and the ability to accumulate savings for future healthcare expenses makes HSAs a valuable component of any comprehensive benefits package.

Flexible Spending Accounts (FSAs): FSAs allow employees to set aside pre-tax funds to cover eligible medical expenses and dependent care costs. The advantage lies in the reduction of taxable income for employees, thereby lowering their overall tax burden. Employers may choose to contribute to employees’ FSAs as part of their benefit offerings. However, it’s important to note that FSAs typically have a “use-it-or-lose-it” provision, requiring employees to spend the allocated funds within the plan year or a grace period.

Implementing these employee benefit programs not only demonstrates a commitment to employee well-being, but also contributes to the employer’s bottom line. The tax advantages associated with HSAs and FSAs create a win-win scenario where both parties benefit. Employers can attract and retain top talent, while employees enjoy financial perks and increased flexibility in managing their healthcare expenses. As part of a broader tax planning strategy, these benefit programs enhance the overall financial health of both the business and its workforce.

4. Leverage Section 179 Deduction

Utilizing the Section 179 Deduction presents a significant opportunity for you as the business owners to enhance their cash flow and invest in the growth of your enterprises. This provision in the tax code allows businesses to deduct the full purchase price of qualifying equipment and/or software in the same year it is acquired. The key advantage lies in the acceleration of depreciation, providing an immediate financial benefit rather than spreading it over several years.

By leveraging Section 179, businesses can acquire essential assets, such as machinery, vehicles, or computer systems, and deduct the entire cost from their taxable income, up to a specified limit. The deduction limit has historically been substantial, making it a powerful tool for small and medium-sized businesses looking to invest in technology, equipment, or upgrades.

It’s important to note that the Section 179 Deduction is not without limits. The deduction begins to phase out for total asset acquisitions exceeding a certain threshold. Therefore, strategic planning is crucial to optimize this deduction effectively. Business owners should assess their current and future needs, align them with the qualifying assets, and capitalize on the immediate tax benefits provided by Section 179.

5. Take Advantage of Tax Credits

Tax credits serve as powerful tools to reduce a business’s overall tax liability, providing a direct and tangible financial benefit. Businesses should proactively identify and leverage applicable tax credits, and some noteworthy options include Research and Development (R&D) credits, Energy-Efficient Property credits, and Work Opportunity Tax credits.

Research and Development (R&D) Credits: Businesses engaged in qualifying research and development activities may be eligible for R&D credits. These credits are designed to incentivize innovation and technological advancement.

Energy-Efficient Property Credits: Investing in energy-efficient improvements for business properties can lead to significant tax advantages. Energy-Efficient Property credits are available for businesses that make eligible energy-saving upgrades, such as installing energy-efficient lighting, heating, ventilation, and air conditioning (HVAC) systems.

Work Opportunity Tax Credits (WOTC): Businesses that hire individuals from certain targeted groups, such as veterans or those facing barriers to employment, may be eligible for Work Opportunity Tax credits. These credits are aimed at encouraging the employment of individuals who may face challenges in finding work. By hiring from these groups, businesses not only contribute to social responsibility but also benefit from reduced tax liabilities.

It is essential for business owners to stay informed about the specific criteria and requirements for each tax credit. Thorough documentation of qualifying activities or hires is crucial when claiming these credits during tax filing. By taking advantage of available tax credits, businesses can optimize their tax position, reinvest savings into growth initiatives, and contribute positively to their communities and industries.

6. Explore Bonus Depreciation:

Bonus depreciation can be a strategic move for businesses seeking to expedite the recovery of costs associated with acquiring property, equipment, or qualified assets. Bonus depreciation allows for an additional deduction beyond regular depreciation, offering a significant upfront tax benefit.

This is particularly advantageous for businesses making substantial capital investments. Under current tax laws, businesses can deduct a percentage of the cost of qualifying property in the year it is placed in service. This goes beyond the standard depreciation schedule, providing an immediate boost to cash flow.

The key feature of bonus depreciation is its flexibility and applicability to a wide range of assets. Eligible property includes tangible assets like machinery, equipment, and furniture, as well as qualified improvement property (QIP), which includes certain interior improvements to nonresidential buildings. This broader scope allows businesses to leverage bonus depreciation for various types of capital expenditures.

Careful planning and consultation with tax professionals can help you optimize your depreciation strategies, align them with their financial goals, and ensure compliance with constant changes to tax regulations.

7. Maximize the QBI Deduction

QBI, or Qualified Business Income, stands as a cornerstone in the realm of tax benefits, crafted to provide crucial support for self-employed individuals and small business owners. This deduction is a powerful tool that allows qualified business owners to make significant reductions in their tax liabilities by either deducting 20% of their qualified business income or 50% of their wages when calculating their tax obligations.

The principle of QBI lies in its ability to lighten the tax burden for eligible entrepreneurs. The deduction operates as a percentage of the income derived from qualified business activities, offering a substantial reduction in taxable income. For instance, if a business owner has $100,000 in qualified business income, they can potentially deduct $20,000 directly from their taxable income, thereby lowering the amount subjected to income tax.

Like most things tax related, there are intricacies of QBI that include specific limitations and thresholds that play a decisive role in determining the applicable percentage – whether it’s the flat 20% or 50% of wages.

The impact of the QBI deduction on reducing income tax payments is significant and cannot be overstated. As the tax landscape evolves, staying informed about QBI and its implications becomes essential for entrepreneurs aiming to optimize their tax positions and enhance their long-term financial success.

8. Manage Timing of Income and Expenses

Managing the timing of income and expenses is a nuanced yet powerful tax planning strategy that can impact a business’s overall tax liability. By carefully orchestrating when income is recognized and when expenses are incurred, you can optimize your taxable income in a manner that aligns with your financial goals.

Deferring Income: You can strategically defer the recognition of income to future periods, effectively postponing the associated tax liability. This can be particularly beneficial if the business anticipates lower tax rates in subsequent years or if there are plans to implement other tax-saving strategies. Common methods of deferring income include delaying the invoicing of clients or strategically timing the recognition of revenue from long-term contracts.

Accelerating Expenses: Conversely, accelerating deductible expenses can be an effective way to reduce current taxable income. Businesses can consider prepaying certain expenses, such as rent, utilities, or insurance, before the end of the tax year. Additionally, purchasing necessary supplies or equipment before year-end can provide an immediate deduction, lowering the taxable income for the current period.

It’s important to note that the effectiveness of this strategy depends on the specific circumstances of the business and the applicable tax laws. Factors such as the business’s accounting method (cash or accrual), the nature of its income, and its overall financial objectives should be considered when implementing timing strategies. This approach requires careful planning and consideration of the unique circumstances of each business, making it advisable to seek guidance from tax professionals.

9. Hire Your Spouse or Older Children

The option of employing your spouse or older children to fulfill various roles within your business is something you may want to consider. Hiring your spouse not only provides them with wages for the year but also offers a deduction for your business. The significant advantage here is that by being on the payroll, they gain access to your business’s retirement account, allowing them to defer income and contribute more towards retirement savings.

This opportunity extends to your children as well. However, it’s crucial to keep in mind that if the compensation surpasses the standard deduction threshold, they may be required to file a payroll tax return. Despite this, there can be added benefits, as they might even qualify for a tax refund from the state in which they are employed.

It’s essential to approach this tactic with a focus on the genuine value your family members bring to the business, ensuring compliance with tax regulations and maximizing the overall financial benefits for both your family and the business.

In our experience, effective tax planning is a key component of the financial success for many business owners. These strategies are just the tip of the iceberg when it comes to the world of tax planning. While not all 9 strategies may apply to your current situation, it’s important that you at least understand them and some of the possibilities that exist. Every business is unique, so it’s crucial to tailor these strategies to your specific circumstances with the guidance of tax professionals. At Pathfinder Wealth Consulting we believe it’s important to surround yourself with a competent team of professionals that can help you navigate the complexities and challenges that tax planning for your business can present.

 

Advisory services offered through Commonwealth Financial Network®, a Registered Investment Advisor.