Strategies to Reduce Taxes for Business Owners
Businesses, the people who own them, and the industries they constitute, are unique. I think we can all agree that a grocery store operator is going to have different needs and issues than the dentist down the street.
However, there are some commonalities among business owners, the most important of which is that they all want to minimize their taxes. So how does one accomplish such a feat? Here are a few tax-reduction tips for business owners:
- Max out your contributions. If you already have a retirement plan in place, make sure you know the contribution limits for this year. Even if you don’t have a plan in place, or are considering opening a second account or transferring that account, make sure you know the limits. Each type of retirement plan is different. Depending on the specifications of your company, your contribution limits could be as low as $3,000 or as high as $265,000 annually. The more money you can put away towards retirement, the more you can keep for yourself and away from Uncle Sam.
- Strategically use your benefits. There are a few different tax credits and deductions available to you as a business owner. Work with your financial advisor and your accountant to make sure you are collecting these benefits and employing them at the right time. For example, if you’re predicting that your business is going to need a new vehicle or expensive piece of machinery within the next two or three years, but this year you are having higher-than-expected sales volume, it may be advisable to make the purchase this year in order to reduce your taxes with a business expense.
- Take advantage of tax-deferred exchanges. As a business owner, you are allowed to take advantage of 1031 and 1035 exchanges, which can help lower your tax requirement. A 1031 exchange can occur if, for example, you sell a piece of property within your business and put the settled amount into a new property, which pushes the gain/loss to a later date in time and helps you avoid paying taxes on it in the current year. A 1035 exchange is similar, except instead of a property or asset, you’re dealing with exchanging an insurance policy or annuity.
- Charitable giving benefits both the recipient and the donator One of the most basic things you can incorporate into your financial plan is to make a contribution or donate a gift to a non-profit or charitable organization. Most of them fall under 501(c)(4) or 501(c)(3) status, which means that when you make a donation, it can offset your personal or business tax and save you money.
- Seek guidance from a qualified professional. Lastly, make sure you are working with both a CPA and afinancial advisor. More importantly, make sure everyone in your corner is communicating and working together throughout the year so you’re getting the most benefit during tax season.