7 Smart Year-End Tax Planning Moves For Small Business Owners (2024)

While some of you may still need to file your 2021 taxes, the 2023 tax season (filing your 2022 taxes) is just a few months away. New Year's Eve will be here before you know it, and with the stroke of midnight, many tax-saving strategy deadlines will have passed.

The fourth quarter each year is the time for some proactive tax planning to lower the tax liabilities of your small business (hopefully with a high income). For successful business owners, tax planning shouldn't be a once-per-year exercise when filing your taxes. With extensions, you may be able to delay filing your 2022 taxes until late 2023. However, many tax planning moves that can help lower your total taxes owed may need to be made before the end of the current year.

Review Your Estimated Net Income

Has your income jumped substantially? Has soaring inflation sapped the profitability of your business? Changes in your income, either up or down, can significantly change your tax planning for the year. With a higher income, you may want to be more aggressive in looking for tax deductions. On the flip side, when your income drops, you may become eligible for other tax breaks that you haven't considered in the past.

Are You Using the Best Business Entity?

What corporate structure are you using for your business, if any? Are you a sole proprietor, S-Corp, LLC, Partnership or C-Corp? As your business and income grow, the best structure for your business may change.

If you are making $50,000, the time and effort (and cost) of setting up an S-Corp likely isn't worth it. However, the tax planning math often changes as you earn six figures or more. You should review this with your tax professional and tax-planning Certified Financial Planner™ every few years (more often if your business is growing rapidly or if there have been changes to the ownership).


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Optimize Your Business Retirement Plan

One of the best ways for small business owners to slash their taxes is to establish and fully fund a retirement plan. This could be anything from a SEP IRA to a Solo 401(k) or a combination of a 401(k) with a Cash Balance Pension Plan. Would you rather write a big check to the IRS or your retirement account? I know which choice I prefer. High-income small businesses can potentially defer income taxes on hundreds of thousands of dollars annually.

Here are a few of the most common retirement plans for high-income-earning small business owners.

SEP IRA - If you are self-employed, you can contribute 20% of your self-employment earnings into a SEP IRA per year. The maximum contribution to a SEP-IRA is $61,000 for 2022. There are no catch-up contributions for SEP IRAs. With no year-end deadline, a SEP IRA can be set up and funded just before filing your taxes for the previous year.

Solo 401(k) - Typically, a Solo 401(k) will allow for the largest pre-tax contributions, which should translate into the largest tax savings. Business employees can contribute up to $20,500 for 2022 plus a $6,500 catch-up contribution if they are at least 50 years old. Additionally, the business can make a profit-sharing contribution, up to 25% of payroll. That means $61,000 (or $67,500 for those over 50) in allowable 401(k) contributions in 2022.

You can also benefit from a Roth Solo 401(k) for the employee portion of your contributions, $20,500 plus a $6,500 catch-up contribution for business owners over 50. If your spouse also works with you in the business, they can be included in the plan, doubling the amount you can contribute and the tax savings.

Defined-Benefit Pension PlanFor business owners looking to save even more on taxes, the Cash Balance Plan (combined with a 401(k)) could allow your business to shelter several hundred thousand dollars in income each year. You may also hear this called a Defined Benefit Pension plan; more likely, your basic financial advisor or CPA won't mention it all (sadly).

Defined benefit pension plans are the most complicated of the small business retirement plans because the plan design is complex and time-consuming. If you are nearing 50 (or older), are already maxing your 401(k) and want to save even more, talk with your tax planning financial planner ASAP. If they aren't able to help you determine if a Cash Balance plan is right for you, talk with someone who can. Many financial advisors are unable or unwilling to do the work to set up a Cash Balance Plan.

Cash Balance Plan contribution limits will depend on the age and income of you and your employees. But they can often run north of $150,000 per business owner annually. (Double this if your spouse also works in the business with you). The tax savings can be huge, especially for those in high-tax states like California and New York.

Are You Eligible for The Home Office Deduction?

These days, small business owners are more likely to work from home full-time. Business owners reading this who work from home may be eligible to take the home office deduction. Here is what you need to know to determine if you qualify and better understand how this often-scary home office deduction works.

This valuable tax break can save hundreds, or even thousands, of dollars in taxes each year. The best part is that you are already incurring these expenses for housing regardless of your business use. Take the time and discuss the home office deduction with your tax preparer to make sure you qualify.

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Don't Ignore Your Bookkeeping

I hope the days of filing your taxes from a shoebox of receipts are long behind you. Even when organized, filing your business taxes can be time-consuming and stressful. Please plan to spend a little time throughout the year to stay up to date on your bookkeeping (or hire someone to do it for you).

Claim First-Year Bonus Depreciation

One of the positive changes from the Tax Cuts and Jobs Act (TCJA) is that you can now get a 100% first-year bonus depreciation for qualified used and new property acquired and placed in service during your 2022 business year. To put this more plainly, you may be able to get a tax break for the entire cost of assets purchased in 2022. If you have a big income year, you may consider moving up some planned purchases into 2022.

Planning ahead, these tax benefits begin to phase out after 2022.

Stay Proactive with Your Tax Planning

With proper timing (from proactive tax planning), your income and deductions could become even more valuable. For those who use pass-through entities (Sole Proprietor, S Corp, LLC, or Partnership), your portion of the business profit and deductions are passed through to you and eventually taxed on your own personal tax returns. Taxes are based on your overall household income and filing status.

We are expecting some changes to tax brackets in 2023 and some increases to retirement plan contribution limits.

For the self-employed, minimizing taxation is one of the best ways to increase the net profitability of all your hard work in your business. Be proactive and work with your tax planning Certified Financial Planner™ and CPA to develop a strategy to make proactive tax planning choices that will help you keep more of your hard-earned money. In the case of retirement accounts, would you rather write a check to yourself or the IRS? The choice is yours.

As someone deeply immersed in financial planning and tax strategies, I understand the intricate details that go into optimizing tax liabilities for individuals and small businesses alike. Tax planning isn't merely an annual chore but a strategic endeavor that requires foresight and proactive decision-making.

Let's dissect the concepts and strategies embedded within the provided article:

  1. Tax Planning and Proactivity: The article emphasizes the importance of proactive tax planning, highlighting that waiting until tax season is suboptimal. Instead, it suggests considering tax-saving strategies throughout the year.

  2. Reviewing Income Changes: Adjustments in income levels significantly impact tax planning. Whether income increases or decreases, it prompts a reassessment of deductions and tax breaks to optimize tax liabilities.

  3. Business Entity Structure: The article discusses the importance of periodically reassessing the business entity structure concerning tax implications. It touches upon various structures like sole proprietorship, S-Corp, LLC, Partnership, or C-Corp and suggests seeking advice from tax professionals to determine the most suitable structure based on income and growth.

  4. Retirement Planning: Establishing and funding retirement plans is highlighted as a crucial strategy for tax reduction. It mentions several options such as SEP IRA, Solo 401(k), and Defined-Benefit Pension Plans, outlining contribution limits and tax benefits associated with each.

  5. Home Office Deduction: Small business owners working from home may qualify for the home office deduction, which can result in substantial tax savings.

  6. Bookkeeping and Organization: Maintaining organized bookkeeping throughout the year is stressed to ease the tax filing process and ensure compliance with tax regulations.

  7. First-Year Bonus Depreciation: The article discusses the tax benefits of first-year bonus depreciation for qualified property acquired and placed in service during the business year.

  8. Anticipating Tax Changes: It advises staying informed about potential changes in tax brackets and retirement plan contribution limits, enabling proactive adjustments to tax strategies.

Overall, the article underscores the importance of proactive tax planning, strategic decision-making regarding business structure and retirement planning, and staying abreast of tax law changes to optimize tax liabilities for small business owners. By implementing these strategies, individuals and businesses can maximize tax efficiency and retain more of their hard-earned income.

7 Smart Year-End Tax Planning Moves For Small Business Owners (2024)
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