One of the undeniable perks of being an entrepreneur is the satisfaction of seeing your hard work pay off in tangible success.
As many of my clients begin to experience high-earning years or a significant wealth moment such as the sale of a business, it’s vital to address a critical question: Are you truly utilizing your business for maximum tax advantage?
Let’s dive into this.
1. Retirement Contributions: The Dual Benefit
If you haven’t considered this yet, now is the time. Establishing a retirement plan for your business not only ensures you have a comfy nest egg for the golden years, but contributions made towards these plans can reduce your taxable income for the present year. Whether it’s a SEP IRA or a solo 401(k), these contributions can be significant. It’s like telling your older self, “I’ve got your back!” while still savoring the present.
| We’ve written even more on the subject of retirement, check it out here.
2. Leveraging Tax Credits: The Unsung Heroes
While deductions reduce your taxable income, tax credits reduce your tax bill directly and are often overlooked. There’s a slew of credits available for businesses. Hiring veterans? Going green with your business operations? There’s likely a tax credit waiting for you. It’s like the universe (or at least the IRS) is giving you a high-five for making smart, ethical business choices.
3. Re-examine Your Business Structure
The way your business is structured – sole proprietorship, S-corp, and so on – can have a profound impact on your tax obligations. Each comes with its own set of tax benefits. Maybe when you started, a simple sole proprietorship was apt, but now as your earnings are on an uptrend, it is important to evaluate with a financial advisor like Aligning Wealth if a switch would be tax advantageous. It’s all about optimizing benefits and not overpaying.
| We’ve written even more on the subject of business structure, check it out here.
4. Leverage Depreciation
Some entrepreneurs opt to purchase commercial properties to house their operations. Not only does this give you control over your business space, but it also offers depreciation deductions which can be quite substantial. Other assets that can often depreciate over the years include vehicles and office equipment.
5. Consider Year-End Purchases
If you’re expecting a high-profit year, consider making significant year-end purchases for business-related items you were planning to buy the following year. This can increase your expenses for the current year and reduce taxable income.
Some examples of year-end purchases can be office supplies, professional photography or lighting equipment, prepaying expenses (like rent, insurance, or other fixed costs for the next year), or investing in training or marketing by pre-booking ad placements or signing up for courses and workshops for the next year.
But remember to only buy what you genuinely need. Don’t spend money just for a tax break. The purpose is to accelerate purchases you would have made anyway, not to make unnecessary expenditures.
6. If You Haven’t Had Such a Good Year, Carry Forward
If you’ve had a bad year and faced losses, you might be able to carry these losses forward to offset future profits to offset past profits. If your business cannot use up all of its losses in a single year, it can “save” this loss and deduct it from future profits. This is called a Carry Forward. Again, tax laws often specify how many years you can carry forward a loss.
7. Put Money toward Tax-deferred Growth Investments
Invest in tax-deferred accounts or ventures. This allows your investments to grow without being reduced by taxes annually, only being taxed upon withdrawal. Popular tax-deferred investment vehicles include retirement accounts, annuities, and education savings accounts.
While tax-deferred growth is a valuable component of your financial strategy, we encourage you to diversify by balancing your portfolio with taxable accounts, tax-free growth accounts (like Roth IRAs), and other financial instruments to ensure flexibility and optimize overall tax strategy. (This is where the guidance offered by Aligning Wealth comes in!)
8. Explore Qualified Business Income (QBI) Deductions
Many small business owners and freelancers can deduct up to 20% of their qualified business income if they meet certain criteria. The QBI dedication was introduced as part of the 2017 Tax Cuts and Jobs Act to offer tax relief to smaller businesses and certain real estate investors who might not benefit from the significant corporate tax cut. The QBI deduction offers a significant opportunity for tax savings, but its intricate requirements can make it challenging to navigate. Again, this is where using a financial planner like Aligning Wealth can be most strategic.
9. Set the Foundation with Sound Estate Planning
Owning a business adds a layer of complexity to estate planning. But whether you’re planning a multi-generational legacy or thinking of a future sale, you need a solid blueprint. Having a well-thought-out estate plan protects your wealth, your loved ones, and your business’s future.
Many people express concerns about the estate tax without fully understanding the exemptions in place. In 2023, the federal estate tax exemption stands at $12.92 million, and 38 states do not levy a statewide estate tax. Moreover, with the appropriate legal measures, a couple can shield up to $25.84 million upon the death of both spouses. While concerns about estate tax are valid for those with assets exceeding the $12.92 million mark, we can also strategically plan to maximize the assets future generations inherit through tax-conscious strategies for your children, grandchildren, and beyond.
| We’ve written even more on the subject of estate planning, check it out here.
10. Clarify the Complex: Consult the Pros
As your business grows, so will the complexity of your financial landscape. Investing in a financial expert like Aligning Wealth will unveil strategies you might have missed. We can also guide you through upcoming changes and ensure you’re not leaving money on the table, often partnering with or referring you to specialists such as tax professionals to ensure you stay on the right course.
| We’ve written even more on the topic of working with financial advisors, check it out here.
Like the deliberate attention you give to each aspect of your business, your tax strategy deserves the same level of finesse. Embrace this. With the right moves, you’re not only elevating your business but ensuring you’re reaping the maximum rewards of your hard work. Yet remember that tax laws are always changing, so having professional advisors in your corner is imperative. Be audacious, be strategic, and never stop seeking ways to enhance your financial prowess.