Marcus Dillon, Founder of Dillon Advisors; breaks down this question in this video. Don't feel like watching? Read on below!
You may be asking yourself, “What tax savings opportunities am I missing?” This is a great question, often with significant potential. Regardless of line of work, most everyone is interested in saving money whenever possible, but as a business owner, this question may hold extra weight.
When identifying tax savings, first address these three points.
1. How are you structured?
Entity selection plays an important role in identifying potential tax savings. If you are structured in the wrong way, or operating in a way that is inconsistent with your entity selection, you could be paying thousands, tens of thousands, or hundreds of thousands of dollars unnecessarily. Whether you are a Corporation, LLC, Partnership, or S Corporation, each one has its benefits and restrictions for tax savings.
S Corporation is a choice worth considering. It has many benefits to consider. For example; Business owners can pay themselves a more reasonable amount under an S Corp. How? Software and tools exist to look at the census and payroll data for similar businesses to help determine reasonable compensation. The net profit that remains after paying yourself that reasonable compensation, while it is still subject to federal income tax, is not subject to self-employment tax or payroll taxes. This approach helps avoid red flags with the IRS.
Entity selection is a great starting point for finding tax savings.
2. Retirement planning
Retirement planning is another strategy to investigate. Considering family goals and aligning them with the overall business plan is important, and choosing retirement plans that are low-maintenance and easy to implement will streamline this. Depending on what makes sense, it may be recommended to expand to a 401K, a profit-sharing plan, or a cash-balance plan as well.
It is encouraged that business owners factor in their employee costs. While an employee retirement plan can be an important and worthwhile benefit, we aim to help business owners ensure that they are being good stewards of their resources.
For a more in-depth retirement savings strategy, learn more here in “What is a backdoor Roth contribution".
3. Business expenses
What business expenses are you incurring out of pocket? We want to make sure that business owners are either reimbursed for those expenses, or that they are running them through the business directly (which ultimately benefits the owner). Examples that are often overlooked include:
- Telephone expenses
- Home office expenses
- Mileage for work travel
All three of these expenses are deductions of the business which lower the business income and potential personal income, but they do not generate income on the other side when the owner reimburses themselves. This way the business is paying its fair share, and the owner gets the money back that they have worked so hard for.
These are some of our most common suggestions for business owners looking to save on taxes. With that said, there are countless strategies, so how do you determine which ones would be most beneficial for you?
Determine your one, three, and five-year goals. Those goals are essential for many business objectives, including accurately implementing the most advantageous tax strategies. Working with a Controller or a CFO is recommended to identify the best tax savings strategies. Both roles are critical to accounting and tax strategies and this article breaks that down further. Controller vs CFO.
As a firm dedicated to helping businesses maximize their tax savings, we are here to assist you in defining those goals, and here to answer any questions you may have about various tax strategies. Before implementing any strategy, we will evaluate its application to you and your unique situation.