Whether you own a small business or you’re a high-level executive at an established enterprise, tax season can be one of the busiest and most stressful times of the year. After all, taxes are a crucial component of your company’s financial picture, and the decisions you make may bear implications for all of your stakeholders – from employees to clients to investors in the company.
Tax planning isn’t a simple process, especially for those with businesses to consider. While it’s always wise to consult with a tax specialist who understands your business and can help you identify savings opportunities, there are a number of steps you can take today that may improve your position ahead of the next tax deadline.
So, what are some money-smart strategies you can use to manage your firm’s tax obligations this year? Here are seven tax planning tips for business owners.
1. Keep Accurate and Organized Records
The foundation of effective tax planning is accurate and organized recordkeeping. As a business owner, you should keep track of all your income and expenses, including receipts, invoices, and other financial documents. By maintaining complete and accurate records, you can ensure that you’re able to claim all the deductions your business is entitled to and reduce the risk of tax audits. Utilizing accounting software or hiring an accountant can help you stay organized and ensure compliance with tax laws.
2. Defer Some of Your Taxable Income
If your company pays taxes on a cash basis (i.e., it only records revenue as money received), you might want to consider deferring some of its income to next year.
While this won’t free your company from tax liability, it can help save some money for the current year. Note that deferring income doesn't eliminate your tax liability completely. Your business will still have to pay taxes on the deferred income eventually, and if tax rates increase in the future, the deferred income could be subject to a higher tax rate.
3. Lower Your Taxable Income
By taking advantage of all possible tax deductions, elections, and credits, you may be able to keep your business in a lower tax bracket and ultimately pay a lower tax rate. You may also be able to avoid having to make additional payments, such as to Medicare.
Deductions to consider include qualifying business expenses and contributions to retirement and health savings accounts. For instance, if your business purchases new equipment, the 2018 Tax Cuts Act allows you to deduct up to $1 million of the upfront costs.1 On the other hand, you might be able to carry over certain tax deductions that don’t work this year into the future, such as home office deductions, business credits, and sometimes even capital or net operating losses.
4. Offer Fringe Benefits to Employees
Since 2022, US wages have increased by 1% on average, which has led to a rise in employment tax costs for many businesses.2 Including fringe benefits in your employee compensation package can be a good way of enticing candidates without also triggering higher taxes. These benefits can include things like medical insurance, child care assistance, reimbursements, and even student loan payments. In the latter case, the CARES Act includes a payroll tax exemption through 2025 for employers paying for their workers’ student loans.3
5. Evaluate Your Exit Planning Strategy
Exit planning is an important tax consideration for business owners because it can help you prepare for the eventual sale, transfer, or liquidation of your business in a tax-efficient manner. A well-structured exit plan can minimize your tax liability, maximize the value of your business, and ensure a smooth transition to new ownership or management. It can also help you preserve gift and estate tax exemptions while allowing you to plan for the next chapter of your life.
6. Review Your Retirement Plan
Retirement plans can be another powerful tool for cutting your tax bill. The more you’re able to contribute, the more you’ll be able to write off in deductions. But be strategic about where you contribute – if you believe your current tax rate is lower than what it will be during retirement, consider contributing more funds to Roth accounts. You’ll have to pay more in taxes now, but you’ll benefit from tax-free withdrawals later down the road.
7. Partner With a Tax Professional
Tax planning shouldn’t be something you only think about come tax season – proactive planning is important if you wish to maximize your benefit. As a business owner, it’s essential to stay up to date on current tax laws and keep an eye on your books year-round so that you’re prepared to take advantage of saving opportunities.
Partnering with a tax professional is one of the best ways to manage your tax burden, as they can guide you through the right strategies for you and your business. Our head of Financial Planning, Ryan Firth, is an experienced CPA and credentialed Certified Financial Planner (CFP) who can help you establish a sound financial plan for your family and business. Reach out to Ryan today to see how your business could benefit.