As a successful business owner, it probably seems like you are always dealing with taxes. If you file on extension, you probably need to be doing year-end tax planning around the same time you file your prior year’s tax returns. Tax planning should be a year-round endeavor for the best results and to avoid leaving the IRS a huge tip. It’s not just something you think about once per year while filing your taxes.
The year 2024 will be over before you know it. Many valuable tax-planning strategies must be implemented or at least set up before New Year’s Eve strikes midnight. Below, we will share eight tax-planning strategies for small business owners to help lower their tax bills yearly.
The higher your income, the more you can potentially save with valuable proactive tax-planning strategies. This is even more pertinent for business owners in high-tax states like California, with a top state tax bracket of 13.3%, on top of the current highest federal tax bracket of 37%. Sadly, many business owners work to get their taxes filed and, for the most part, skip over any opportunities to implement tax-minimizing strategies.
Review Your 2024 Estimated Self-Employment Income
Bidenomics has helped many business owners have record incomes in 2024. While earning more money is great, it can also bring quite a few tax headaches. Even if your income was below average in 2024, paying fewer taxes can still increase your net after-tax take-home pay. With a lower income, you may even be eligible for tax credits or tax deductions that you haven’t been able to benefit from. Understanding your 2024 income will help determine how aggressive you need to be with tax planning before the year’s end. It can also help you avoid a surprisingly large tax bill when you eventually file your taxes, not to mention helping to avoid underpayment penalties and interest.
Is Your Business Entity Set Up Properly?
Are you running your business as a sole proprietorship or another business entity? Would restructuring your company as an S-Corp, LLC, Partnership, or C-Corp help you lower your annual tax liabilities? Even if you have gotten guidance on this topic in the past, as your business and income grow, the best structure for your business may change.
If your business leaves your earning $100,000 (or less), the time and effort (and cost) of setting up an S-Corp likely isn’t worth it. However, the tax-planning benefits increase by incorporating your business as your income grows. 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 of your business).
Optimize Your Small Business Retirement Plan
The more income you have, the more beneficial optimizing your small business retirement can be when it comes to minimizing taxes. Also, having the right retirement plan for your business can help you achieve financial freedom more quickly.
Likewise, maximizing the benefits of your small business retirement plan is a fabulous way to minimize your taxes each year and increase your financial security in retirement. Would you rather write a check to the IRS or to your own retirement account? The choice is yours. High-income, self-employed business owners could 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 2024
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 $69,000 for 2024. 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) 2024
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 $23,00 for 2024 plus a $7,500 catch-up contribution if they are at least 50. Additionally, the business can make a profit-sharing contribution of up to 25% of payroll. That means up to $76,500 can go into your solo 401(k) pre-tax in 2024.
You can also benefit from a Roth solo 401(k) for the employee portion of your contributions, $23,000, plus a $7,500 catch-up contribution for business owners 50 and older. If your spouse also works with you in the business, that person can be included in the plan, doubling the amount you can contribute and the tax savings.
For business owners looking to save even more, 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 people call this a Defined Benefit Pension Plan; it’s more likely that your basic financial advisor or CPA won’t mention it all (sadly).
Defined benefit pensions are the most complicated of the small business retirement plans because their 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 financial planner about your tax strategy as soon as possible. If your advisor can’t help determine whether a Cash Balance Plan is right for you, talk with someone who can. Some might be unable or unwilling to do the work to set up this type of plan.
Will The Home Office Deduction Lower Your Taxes?
Do you find yourself doing much of your work at home? Your business may be eligible for the home office tax deduction if this sounds like you. The great thing about this tax break is you are already spending the money on your home and other expenses like utilities and internet.
Here is what you need to know to determine if you qualify and better understand how this often scary home office deduction works.
Ignoring Your Bookkeeping Will Cost You
You will miss valuable tax deductions if you don’t track your spending. I’ll be the first to admit that bookkeeping isn’t fun, but neither is overpaying your taxes. Plan to spend a little time throughout the year to stay updated 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 is that you can now get a 60% first-year bonus depreciation for qualified used and new property acquired and placed in service during your 2024 business year.
Choose Wisely When Making Big Purchases
If your income is higher in 2024 than expected in 2025, you will likely want to make purchases now. On the other hand, if your income may be substantially higher next year, you may want to put off large purchases.
Be Proactive With Your Tax-Planning Strategies
What is the point if you set up the best retirement account but never fund it? Similarly, what is the point if you have a bunch of tax-deductible expenses but don’t track them (and miss out on tax deductions)? Tax planning is not a once-a-year meeting with your tax preparer.
With proper timing (from proactive tax planning), you can make your income more valuable in terms of net take-home pay. 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 personal returns. Taxes are based on your overall household income and filing status.
When you are self-employed, minimizing taxes is one of the best ways to increase the net profitability of all your hard work. Be proactive and work with your tax-planning CFP and CPA to develop a strategy to make proactive choices to help you keep more of your hard-earned money. Would you rather write a check to yourself or the IRS regarding retirement accounts? The choice is yours.
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