For many small business owners, saving money on your income taxes is usually at the top of the list of your top concerns. If you are the owner of a pass-through entity, such as an S Corporation, an LLC, or a Partnership, etc., you may have noticed the nice little tax break that you received in 2018, as most pass-through business income received a 20% deduction.
Besides changes to the tax code, there are several other things that small business owners can do to save money on taxes and grow the value of your retirement funds at the same time. The first step in moving toward this goal is to hire a Certified Financial PlannerTM or Wealth Advisor to help you discover which option makes the most sense for you.
Here are three things that you can do to limit your tax exposure and build business wealth.
- Take full advantage of the retirement plans that are available to you. Depending on how many employees you have, there are several different plans that can help you pump up your retirement savings in a tax efficient manner. The following three plans are examples of a few that might make sense, and there are many more that could accomplish a similar outcome as well.
Safe Harbor 401K
If you have employees, this is a great tool for maxing out your tax deferred contributions for yourself, yet limiting the amount that you are required to put away for employees while also allowing them to save for retirement within the plan.
SEP IRA– If you are a solo operator and do not have any employees, a SEP IRA can be a great way to shelter your income and defer taxes. You can put up to the lesser of 25% of your income or $54,000 into a SEP in 2019 and it will defer the federal income tax on those earnings until the money is withdrawn from the account.
SIMPLE IRA– If you have employees and don’t want to go to the trouble of administering a 401K, you can always set up a SIMPLE IRA. This will allow you to shelter money for yourself while allowing your employees to do the same. The contribution limits are lower on a SIMPLE IRA than they are on a 401K, but a SIMPLE IRA is easier to administer than a 401k plan.
- Make sure that you are taking full advantage of business deductions. Especially now that you may not be able to write off as many personal deductions under the new tax code, be sure that you are taking advantage of your business deductions. Don’t misconstrue this for tax advice because you need to talk to your accountant to understand all of the deductions that are available to small business owners. However, two big factors to keep in mind when thinking about write offs and deductions are your vehicle and money spent on entertaining clients. As mentioned, your accountant is the best source for this information.
- When the time comes to sell your business, know what the tax ramifications are. If you are anywhere near retirement and are getting ready to sell your business, it is a good idea to work with your accountant to know what the tax ramifications of the sale might be. There are two types of taxes that can be paid on the sale of a business, capital gains and ordinary income. In general, capital gains tax is more advantageous to an individual than ordinary income tax. There may be certain things that you can do within the sale to allow for the bulk of the sale to be characterized as a capital gain instead of ordinary income. Again, this is something that you should think through carefully with your CFP® and your CPA prior to completing a sales contract.
These are just three of many ways that small business owners can use the tax code to their advantage. Hiring a Wealth Manager like our team at Metcalf Partners Wealth Management can greatly increase your ability to identify these opportunities.
By being familiar with your individual situation and cooperating closely with your CPA, it may be possible to save thousands, even hundreds of thousands of dollars in taxes over the course of your career.
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.