Maximizing the Tax Advantages of Business Ownership
As a business owner, growing your business is one of, if not the most, high priority item you have, day in and day out.
It’s a conversation we have with clients every day, and as a business owner, I know how important it is to you.
Every stage of your business brings different things to tackle, but they all have one thing in common – taxes.
Business owners have unique tax advantages.
And an effective tax plan will be flexible and customized to your own business and personal situation, but there are some areas common to all good tax strategies that will help you get started.
Throughout this blog post, we’re going to dive into 3-key areas you should think about.
Choosing the right structure for your business
First, it’s important to decide on the right structure for your business. No matter how you cut it, the decision to incorporate or not often comes down to two aspects: tax planning and personal liability. For many businesses, the simplicity of a sole proprietorship or the limited protection of an LLC is enough.
On the other hand, corporations offer robust protection from personal liability and can make raising capital and attracting top talent easier. You’ve heard of a “C” Corp, but “S” Corp often comes up in discussions. An “S” Corp can offer similar advantages but comes with additional tax benefits. As defined by the IRS, an S Corp is a corporation that elects to pass corporate income, losses, deductions, and credits through to its shareholders for federal tax purposes. Shareholders of an S Corp report the flow-through of income and losses on their tax returns and are taxed at their individual income tax rates. This allows S corporations to avoid double taxation on the corporate income compared to the C corp.
Now, if you’re thinking about converting, it’s a process, so you’ll need to weigh the costs and benefits carefully.
Choosing the right Retirement plan for you and/or your employees
Setting up a retirement plan for your business has many benefits. From the simplest IRA or Solo 401(k) to a traditional administered 401(k) plan for all employees, there’s a plan that’s right for your business. Attracting and retaining top talent is one of the key pieces in building a successful company.
Want to hear how big of a benefit a good plan can be? Betterment recently sponsored a survey that asked respondents if they would leave their current job for one that offered a high-quality 401(k) plan, and 65% of them said yes. In addition, 56% indicated they could be lured away by a 401(k) with an employer matching contribution to a retirement plan.
There are several plans to choose from. If it’s just you and your spouse, the Solo 401(k) functions like a regular 401(k), except as the business owner, you can contribute both as an employee and as an employer. If you have more employees, a SEP or SIMPLE IRA may be right for you. Taking a step back to figure the structure out can provide major benefits down the road for you and your people.
Figure out where you can optimize taxes for your business.
There are many opportunities to maximize deductions. Whether it’s marketing expenses, retirement plan contributions, health insurance premiums, legal and professional services, or another item, identifying what you can deduct as you grow your business can be essential to lowering your tax bill at the end of the year.
But remember, it's all about balance and ensuring you’re coordinating with your advisor or tax accountant to understand the opportunities. Your business will change from year to year, throughout economic and market cycles, and you'll have a natural business cycle as you and your business mature.
Planning for taxes should be regarded like cash flow planning. You should identify short- and long-term tax savings opportunities and match them to your business planning.
If you have any questions, feel free to contact us today.
*DISCLAIMER: The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2022 FMG Suite.
Briarwood Financial Planning LLC (Briarwood) is a registered investment advisor offering advisory services in the State of Washington and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training.
The information on this site is not intended as tax, accounting, or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement of any company, security, fund, or other securities or non-securities offering. This information should not be relied upon as the sole factor in an investment-making decision.
Past performance is no indication of future results. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any recommendations made will be profitable or equal any performance noted on this site.
The information on this site is provided “AS IS” and without warranties of any kind either express or implied. To the fullest extent permissible pursuant to applicable laws Briarwood Financial Planning LLC disclaims all warranties, express or implied, including, but not limited to, implied warranties of merchantability, non-infringement, and suitability for a particular purpose.
Briarwood does not warrant that the information on this site will be free from error. Your use of the information is at your sole risk. Under no circumstances shall Briarwood be liable for any direct, indirect, special, or consequential damages that result from the use of, or the inability to use, the information provided on this site, even if Briarwood or a Briarwood authorized representative has been advised of the possibility of such damages. Information contained on this site should not be considered a solicitation to buy, an offer to sell, or a recommendation of any security in any jurisdiction where such offer, solicitation, or recommendation would be unlawful or unauthorized.