Growing Your Business and Tax Complexity
We all know growing your business is a multifaceted journey. Whether you’re just starting and hustling to get revenue-positive, you’re in that gritty mid-stage planning long-term strategies, or you’re at a mature stage optimizing for an exit—there’s one thing that’s consistent. Taxes.
Taxes aren’t something you should only think about when April rolls around. No, a smart business owner strategizes year-round. Crafting a multi-year tax plan can significantly enhance your business’s profitability and evolution. Imagine it as a living, breathing blueprint that adjusts as your business grows.
Remember that while you want to keep taxes in mind at all times you should not let the tail wag the dog, that is to say don’t let tax optimization get in the way of growing your business or running a profitable one!
Start with the Right Structure—or Convert
Choosing the right business structure is often a balancing act between tax optimization and personal liability protection. While some entrepreneurs gravitate towards the straightforwardness of a sole proprietorship or partnership, others may find the limited liability features of an LLC sufficient. However, corporations bring the benefits of robust personal liability shields, streamlined capital-raising capabilities, and an edge in recruiting top-notch talent.
An S Corporation (S Corp), as classified by the IRS, is particularly attractive for those looking to sidestep the double taxation issue faced by traditional C Corporations. Essentially, an S Corp chooses to channel its corporate income, losses, deductions, and credits directly to its shareholders. This flow-through structure enables shareholders to report these financial elements on their individual tax returns, taxed at their own personal rates. While this provides tax advantages, it’s essential to note that S Corps are still liable for taxes on specific types of income, such as built-in gains and passive income, at the corporate level.
If your business has already launched and you’re considering a shift in its legal structure, rest assured that it’s doable. However, switching from one format to another involves both costs and logistical complexities, so you’ll need to assess the trade-offs.
Unlock the Power of Retirement Plans for Your Business
Implementing a retirement plan in your business isn’t just an excellent way to secure your and your employees’ futures; it’s also a strategic move that can help you build a thriving enterprise. Whether you’re interested in straightforward options like an Individual Retirement Account (IRA) or Solo 401(k), or you’re considering more comprehensive 401(k) plans for your team, there’s a retirement solution tailored to your business needs.
The Competitive Edge: Attract and Retain Talent
We live in a time when the dynamics of employment are rapidly changing. More than ever, employees, who often have the flexibility to work from home, are giving higher weighting to financial benefits. A retirement plan isn’t just a nice-to-have; it’s often a deciding factor. A survey by Betterment revealed that a staggering 65% of respondents would consider leaving their current job for one offering a superior 401(k) plan. Additionally, 56% could be swayed by employer-matching contributions to the retirement fund.
Reap the Tax Benefits
Don’t let the administrative costs deter you. Company contributions to 401(k) plans are tax-deductible business expenses. Furthermore, you might also be eligible for additional tax credits specifically designed for small business owners who offer such plans.
Your Options, Tailored to Your Needs
Solo 401(k) – For the Solo Entrepreneur
If your business operation is a one-man show or involves only you and your spouse, a Solo 401(k) could be the perfect fit. This plan allows you to make contributions both as an employer and as an employee, offering dual tax benefits.
SEP IRA – For Business With Variable Profits
If your business has more employees, and you’re looking for a flexible contribution model, the Simplified Employee Pension (SEP) IRA might be your go-to option. It enables employers to contribute up to $61,000 in 2022 on behalf of each employee. A standout feature of SEP IRAs is the flexibility it offers: you can skip contributions during lean years without any penalties.
SIMPLE IRA – For Small to Mid-Size Businesses
Ideal for businesses with fewer than 100 employees, the Savings Incentive Match Plan for Employees (SIMPLE) IRA offers two contribution choices:
- Non-elective Contributions: Contribute a fixed 2% of each employee’s salary annually, regardless of whether the employee contributes or not.
- Elective Contributions: Match each employee’s contribution dollar-for-dollar, up to 3% of their salary.
In summary, retirement plans can serve as a powerful tool for both employee retention and tax optimization. Your business’s specific needs and scale will dictate which plan is best suited for you.
Understanding Tax Deductions and Credits for Business Owners
Tax deductions and tax credits are crucial tools for business owners, serving distinct but complementary roles in your tax strategy.
Tax Deductions: Reducing Your Taxable Income
Tax deductions directly reduce your taxable income, lowering the amount you’ll need to pay in taxes. Here are some common deductions you should consider:
- Retirement Plan Contributions: Setting up a retirement plan for yourself and your employees not only secures your future but also offers you a tax break.
- Health Insurance Premiums: The premiums you pay for a healthcare plan can be deductible.
- Marketing Expenses: Investments made to advertise and grow your business are often deductible.
- Business Insurance Premiums: Premiums for liability or property insurance for your business can be written off.
- Legal and Professional Services: Fees paid to lawyers, accountants, or consultants can also be deducted.
- Home Office Expenses: If you run your business from home, you may be able to deduct costs related to your home office.
- Self-Employment Taxes: You can claim a portion of the Social Security and Medicare taxes you’ve paid.
- Interest on Business Loans: Interest payments on loans taken out for business purposes are typically deductible.
- Qualified Personal Expenses: In some instances, personal expenses that are directly related to your business can be deducted.
However, it’s crucial to strike a balance. Overusing deductions can trigger an audit, make securing loans more challenging, and potentially reduce your business’s sale value. The adage “Don’t let the tax tail wag the business dog” serves as a useful reminder here.
Tax Credits: Decreasing Your Tax Liability
Unlike deductions, tax credits are incentives provided by the government that directly reduce your tax liability. They are like coupons against your tax bill and are designed to encourage specific business behaviors.
- Health Insurance Premiums: Certain credits can help offset the cost of providing health insurance to your employees.
- Paid Family and Medical Leave: Offering paid family and medical leave can qualify you for a tax credit.
- Work Opportunity Credit: This credit encourages the hiring of individuals from certain target groups.
- Research Activities: Businesses involved in research and development may be eligible for R&D credits.
- Disabled Access: Making your business accessible to individuals with disabilities can yield a credit.
- Childcare Facilities and Services: Providing childcare benefits can not only attract quality employees but also offer tax advantages.
- Alternative Energy: Investing in renewable energy solutions can offer generous tax credits.
While these credits might seem designed for larger enterprises, smaller businesses can often qualify as well. Because tax credits reduce your tax liability without affecting your taxable income, they are highly advantageous and worth investigating.
By proactively managing both your tax deductions and credits, you can align your financial strategy with your business goals, making smart decisions while effectively managing risk and tax liabilities.
A Dynamic, Integrated Approach to Tax Planning
The landscape of your business isn’t static—it evolves year over year, influenced by market conditions, economic cycles, and the natural maturation of your operations. As such, tax planning shouldn’t be an afterthought but an integral component of your overall business strategy, akin to cash flow management. By doing so, you can pinpoint both short-term and long-term tax advantages that are in line with your business objectives.
A Strategy That Pays Dividends—Now and Later
Aligning your business goals with effective tax planning not only enhances your bottom line in the present but also fortifies your long-term personal wealth. When the time comes for you to exit your business, this proactive approach will leave you with a streamlined, tax-efficient operation that’s more appealing to potential buyers.
Reducing tax planning to merely storing receipts in a shoebox—or its digital equivalent—is a missed opportunity to add real value to your most significant asset: your business. The tax code is largely designed to encourage entrepreneurs to be the risk takers that we are and taking tax planning seriously and weaving it into your broader business goals will pay off, both today and in the future.
Would you like to align your money with your goals, make smart financial decisions, and proactively manage the risks and taxes that come with business ownership and life?
That is what we help clients do.
Securities offered through The O.N. Equity Sales Company, Member FINRA/SIPC, One Financial Way Cincinnati, Ohio 45242 (513) 794-6794. Investment Advisory services offered through O.N. Investment Management Company.
Tax and/or legal advice is not offered by Chris Clepp. Please consult with your tax professional for additional guidance regarding tax-related matters. Estate planning services provided in conjunction with your licensed legal professional.