How to Reduce Taxes for Business Owners…Winning the Long Game

By Brian Seay, CFA

Founding Partner, Capital Stewards

My favorite tax adage is that you should pay everything you owe; but owe as little as possible. As an entrepreneur and business owner, you have unique tax opportunities stemming from the control of your business entities and personal income.

Reducing taxes has always been a long-term game. With the passage of the Tax Cuts and Jobs Act, also known at the Trump Tax Cuts, that notion was solidified. Now, according to the IRS, only ~10% of taxpayers itemize deductions. Maximizing your expenses and deductions is a good starting point, but many higher income earners will find that annual deductions don’t go as far as before. Instead of looking for deductions at tax time, planning with your Huntsville financial advisor needs to start now.

Real Estate Tax opportunities

Notably, Real Estate ownership is one tax reduction option for entrepreneurs, especially if real estate is a strategic asset for your business. A business may use a property to earn positive cash flow, but depreciation expenses may produce losses for tax purposes. If real estate is not part of your core business, you may purchase properties as a personal investment. However, outside investment real estate is not a panacea. There is a $25,000 limit to the amount of real estate losses that can be used to offset other income if you are not considered a real estate professional. So consider the type and amount of property you purchase carefully.

Defer Income THrough Retirement Account Tax Strategies

Business owners are able to contribute to their own retirement accounts as both an employee and employer, which may enable you to save and defer more than $60,000 each year. Opening a SOLO 401k is a great first step in maximizing retirement account contributions. Contributions to retirement accounts for employees are also generally tax deductible, so this may provide both an employee retention tool and deductible expense each year. As your business and income grow, setting up a private pension fund for yourself and employees may further increase income saving and deferral opportunities.

Don’t forget about Heath Savings Accounts (HSAs) as a business owner. You can offer these as part of your company’s benefit package or simply open one for your family. HSAs allow you to defer income and invest over the long-term. Meaning you can max out contributions at $7,700 or more and invest unused funds to cover expenses when healthcare becomes very expensive later in life.   

Long-Term Tax Planning (Leverage A Financial Advisor)

However, simply kicking the can down the road has minimal, if any, real impact. That means working with your Huntsville financial advisor and tax advisor to project income out into the future and plan accordingly. It may even be beneficial to pay more in taxes now at a lower rate than to defer income to a later date when your income tax rate is higher. Expanded access to ROTH 401Ks and IRAs may help in these situations. Our wealth management team can help build a financial plan that devises a long-term income tax strategy.

Minimize taxes on stock holdings

Business owners often have unique opportunities to control their income. Most business owners already expense as many items as possible; so the opportunity is not in additional deductions or expenses. The tax planning opportunity lies in the structure of your business and personal assets. In some situations, a C-Corp, LLC or S-Corp may help reduce your tax bill. Each business is different and the most tax efficient structure is different.

Decisions around business structures, personal retirement account contributions and income deferral strategies should be made together to deliver the greatest impact. As you can see, reducing taxes for entreprenuers and business owners requires planning with your financial advisor over the long term. Our financial advisors work with your CPAs, attorney and other professionals to coordinate strategies to deliver after-tax value. If you would like to speak with a member of our wealth management team, schedule a call here.