Maximizing the Tax Advantages of Business Ownership
Today the Fearless Advisor discusses maximizing the tax advantages of business ownership. See the video & transcript here.
(The video is 5 minutes. Full transcript is below.)
Full Transcript of video
Hey friends, the Fearless Advisor here. Today I am going to discuss how to maximize 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.
In this video, we’re going to dive into three key areas you should think about:
- The structure of your business,
- The retirement plan for you and your employees, and
- The areas to optimize taxes for your business.
1. The Structure of 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 flowthrough 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 a C corp.
Now, if you’re thinking about converting, it’s a process, so you’ll need to weigh the costs and benefits carefully.
2. The Retirement Plan
Next, let’s discuss figuring out your retirement plan for you and 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. To understand the value, 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 percent of them said yes! In addition, 56 percent indicated they could be lured away by a 401(k) with an employer matching contribution to a retirement plan. You might be asking what options are available.
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 team.
3. Optimizing Taxes
Finally, figure out where you can optimize taxes for your business.
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 and 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.
Determining how all the pieces of the tax puzzle fit together and can benefit you can be challenging but worth it.
Thanks for joining us!
Photo credit: F5 Financial
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