Tax Time: Proactive strategies for small businesses

Now that tax season has come to a close, it’s a good time for small business owners to reflect on overall tax strategy. Are your business finances structured to maximize the amount of money you keep in your hands? Are you making the right moves in 2023 to avoid a hefty tab at this time next year?
Proactive Tax Time Strategies for Small Business

Depending on the size of your business, there are different approaches – with varying levels of complexity – to explore. Some strategies fall outside the traditional approach and may seem counterintuitive at first, but we’ve seen clients achieve significant tax savings with a bit of creativity. The key to success is teamwork – between individuals, their financial planners, and tax professionals like Certified Public Accountants (CPAs).

Smaller shops, such as sole proprietorships or mom and pop establishments with few employees, can benefit from the combination of a 401(k) and cash balance plan. It’s easy to set up, easy to administer, and allows you to put away substantially more dollars on a tax-deductible basis than a 401(k) plan alone. This is ideal for people in their peak income-earning years making that last big push to retirement.

Larger businesses should consider registering as a C-Corp and choosing a non-qualified deferred compensation (NQDC) plan. This structure allows highly compensated employees to defer more of their compensation (and therefore, more of their income taxes) than is allowed under a traditional retirement plan. An NQDC has the benefit of unlimited contribution amounts and retained earnings, meaning you can leave profits within the company and avoid paying tax until you withdraw them.

An NQDC does have some hoops to jump through, and there is some risk to leaving profits in the company. You will also be subject to double taxation, both as the employer paying out a salary and an employee receiving it. But don’t discount it out of hand – run the numbers first. The net tax savings is often significant enough to make the extra administration effort worthwhile.

Another key consideration to maximize tax savings is to ensure you’re making the most of qualified business income (QBI) deductions. These allow eligible self-employed people and small-business owners to deduct up to 20% of their qualified business income. They won’t apply to every professional in every industry, but they are an unmissable opportunity if you are in a qualified industry, such as law, consulting or real estate.

As a CERTIFIED FINANCIAL PLANNER™, we help clients structure their business and personal finances to ensure they maintain their lifestyle and set themselves up for their ideal retirement. These strategies often involve an outside-the-box approach that is only possible with a bird’s eye view of the full financial picture. CPAs and plan actuaries are invaluable experts at what they do, while the job of a CFP® is to see the whole picture and consider long-term strategy.

And no matter the size or complexity of your enterprise, it always pays to keep your eye on the prize: Your ideal lifestyle when the time for retirement comes.

Neither Comprehensive Wealth Management (CWM), LLC nor Independent Financial Group (IFG), LLC offer tax advice. Please consult your CPA for specific tax questions.

No investment process is free of risk; no strategy or risk management technique can guarantee returns or eliminate risk in any market environment. There is no guarantee that our investment processes will be profitable.

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