In his monthly segment as financial reporter for Radio Entrepreneurs in March, Manny Frangiadakis spoke with program host Jeff Davis about mitigating taxes. Their discussion covered saving, spending and various tax planning strategies for business owners.
Tax Planning Advice for Business Owners
Don’t wait till the last minute to figure out your tax planning strategy, warns Manny. “There are different things that you could do throughout the year that could really come in handy,” he says. “Maybe not even for this year, but the next year.” For example, if you’re expecting this year to be especially profitable because you have a high sales volume, and you know that within the next three years, you’ll need to purchase an expensive piece of equipment or a new vehicle, you should buy it now. Why? Because it’s better to take the tax deduction at a time when revenue is high. Business owners can also take advantage of government-sponsored tax credits, such as those that exist for owning a plug-in electric vehicle or a vehicle that weighs over 6,000 pounds (the latter even covers some SUVs).
Manny also suggests taking advantage of tax exchanges in specific situations. Let’s say, for example, a business owner has outgrown a piece of property, such as a warehouse, and wants to upgrade to a larger one. He can use a 1031 Exchange to sell the property, and instead of taking the cost basis now and getting taxed on it, put that money towards purchasing another building that will be used for similar purposes in the same industry. “It allows businesses to move forward and start investing in the future,” says Manny.
“A 1035 Exchange is along the same lines,” he continues, “except it has to do with business insurance policies. So if you need to take out a business life insurance policy or business annuity, you can use it to reinvest in a future policy and, in effect, pass it forward.”
However, Manny warns, it’s not a good idea to take a lot of tax deductions in the last few years before you plan to retire. “It can actually make your business seem less profitable,” he states. Taking a lot of deductions may even lead to taking a negative hit and not getting the right purchase price for your business. “You could be selling yourself short,” he continues. “As you get closer to that retirement period, you want make sure your business seems more profitable.”
Additional strategies can lead to saving on taxes and leaving a legacy. In the years leading up to the sale of a business, owners can put their company shares into estates and trusts in order to pass them down to the next generation and get them into a lower tax bracket. Once the sale agreement is made, payments can be spread out over 5 or more years so the business owner doesn’t exceed the limits of his current tax bracket. “This allows you to keep more in your pocket,” says Manny, “and give less to Uncle Sam.”