Tax planning is a proactive process that can earn you huge savings in your business. A strong tax strategy looks at opportunities in the short term and long term to reduce your tax liability. Depending on your financial situation and the current tax laws, this could be a large amount of money to help you build wealth.
To get a sense of the benefits of tax planning and how it works, let’s look at some examples.
S-Corp
One popular tax strategy is filing as an S-Corp. This strategy can help businesses avoid double taxation. In a traditional C-Corp, businesses and the shareholders are BOTH TAXED (this is what’s known as double taxation). With an S-Corp election, however, businesses can avoid this double taxation.
Making the S-Corp election is not as beneficial as it once was before the Tax Cuts & Jobs Act of 2018; but once you hit the $80k-$100k gross revenue mark, you should think about it. But don’t just jump into it; understand that to be an S-Corp, you need to:
File an S-Corporation income tax return
Be on payroll with a reasonable owner’s compensation
Make sure you’re calculating your numbers correctly
So while it’s important to look at the tax savings of an S-Corp, it’s also important to look at the additional expenses it will cause. You should talk to your tax planner to decide if an S-Corp is right for your business and will NET you enough savings to make the election worth it.
Deferring Income
Another strategy is deferring income to a later tax year. For instance, accepting a bonus in the current tax year might push someone into the next tax bracket. That person might decide to defer the income to a future tax year in order to stay in their current tax bracket and therefore lower their tax liability.
Businesses can also defer billing and cash collections until the following year, if they are looking to avoid recognizing income in the current tax year.
Maximizing Deductions
This is an obvious one, but there could be deductions you aren’t even aware of. What typically happens is that newer business owners who used to be employees and aren’t used to being able to deduct expenses, don’t think about how an expense is now an eligible business expense.
It’s vital to talk to your tax planner to make sure you’re taking full advantage of all the deductions available to you.
Tax Credits
A strong tax planner will help you take advantage of tax credits, which are dollar-for-dollar reductions of your tax bill. There are many tax credits available for business owners, such as:
Small Business Health Care Tax Credit – for businesses that provide health insurance to employees
Work Opportunity Tax Credit – for businesses that hire people from disadvantaged backgrounds, such as ex-felons
Disabled Access Credit – for small businesses that make their facilities accessible to people with disabilities
This is a very short list of the many, many tax credits available and of course there are many boxes you need to check off to be eligible, but working with a tax planner can help you find out what credits are good fits for your business!
Retirement Planning
Another tax strategy is retirement planning. It can be a complex process when you’re a business owner – there are so many options out there! From 401(k) to IRA to ROTH IRA, it can be overwhelming.
You need a financial advisor and tax planner to work together to make sure you’re achieving your financial goals while you plan for retirement. Your advisor and planner will work in tandem to answer questions like:
What are the tax savings goals?
What are the retirement savings goals?
Do you have employees?
Do you want the tax savings now, or later?
It’s important to dig deep when using retirement planning as a tax strategy in order to get the biggest savings possible while also following all of the IRS and Department of Labor rules.
Hiring Your Kids
A strategy I love is hiring your kids. I LOVE talking about this one because it’s a missed opportunity for so many business owners, but here’s the catch: document, document, document. The IRS is going to come after you if you are arbitrarily paying your kids.
Your kids have to actually do the work (what a great opportunity to teach them about work and responsibilities that come with money!), and you need to work with a qualified tax strategist to have documentation and proper reporting of it.
And to put into context how tax strategy plays a role here: if you’re paying your kids on an S-Corp, they’re still subject to FICA taxes. If you’re paying them on a Schedule C and they’re under the age of 18, you don’t have to pay those FICA taxes. Again, your tax professional should look at the big picture to decide what will be most beneficial for you, your family, and your goals.
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*Disclaimer: This article is not meant to be tax advice. This is not an all-inclusive list of business deductions. Different rules may apply to each individual taxpayer’s specific situation. Please consult with your accountant.