June 19, 2024

Thrive Insider

Exclusive stories of successful entrepreneurs

Advanced Small Business Tax Strategies for 2023

Name: Julia Rueschemeyer

I am an attorney, and there is a fantastic tax savings opportunity if you a) make between $300,000 and $800,000 per year, b) are a sole proprietor, and c) you are in your 50’s. It is called a “cash balance plan”. You can contribute as much as $340,000 per year with a lifetime contribution limit of $3.4 MILLION dollars. With a cash balance plan, an accountant sets up what looks like a “defined benefit” or “pension” plan for your business. This allows you to contribute much more than can possibly be saved with a SEP-IRA (which is an excellent savings vehicle for sole proprietors wanting to save $50k/year tax-free into an IRA). When you retire, you convert the “cash balance plan” into an IRA, and no longer treat it as a pension. Running such a plan cost about $2-3k per year in accountant and actuarial fees, but the tax savings can easily exceed $100k per year. And the fees end as soon as you end the plan and convert it to an IRA.

Name: Jon Morgan, CEO Venture Smarter

The tax strategy that I often recommend to small businesses is to take full advantage of the Research and Development (R&D) Tax Credit. Many small businesses are under the impression that this credit only applies to large corporations or tech companies, but that’s not the case. The R&D credit is available to businesses of all sizes and in various industries, as long as they are engaged in qualifying research activities. This could include developing new products, improving existing products, or even optimizing internal processes.

The reason why this strategy works really well is because it can significantly reduce a company’s tax liability. The R&D credit is a dollar-for-dollar reduction in your tax bill, meaning every dollar you claim is a dollar saved. Furthermore, unused credits can be carried forward for up to 20 years, providing a long-term benefit. However, it’s important to note that claiming this credit can be complex and may require the assistance of a tax professional.

Name: C.L. Mike Schmidt, Lawyer at Schmidt & Clark LLP

The tax strategy I recommend for small businesses is to utilize Section 179 of the IRS tax code to its fullest extent. This allows businesses to deduct the full purchase price of qualifying equipment purchased or financed during the tax year. That means if you buy or lease a piece of qualifying equipment, you can deduct the full purchase price from your gross income. It’s an incentive created by the U.S. government to encourage businesses to buy equipment and invest in themselves.

This strategy is effective because it can substantially decrease your taxable income, resulting in lower taxes. For small businesses, especially those just starting out, cash flow can be a major concern. By taking advantage of Section 179 deductions, you can invest in the equipment your business needs without taking a significant hit to your cash flow.

Name: Tyler Gregersen, CEO of IdeaWins

My favorite advanced tax strategy is to use Section 125 plans, commonly known as cafeteria plans, which offer a variety of tax advantages for small business owners, and can be crucial in optimizing both employee benefits and the company’s financial health. These plans allow employees to pay for eligible expenses, like health insurance premiums, on a pre-tax basis, leading to significant tax savings for both the employer and the employees.

Firstly, the most direct tax advantage of Section 125 plans is the reduction in taxable income for employees. When employees contribute a portion of their salary to a cafeteria plan, this amount is deducted from their gross income before taxes are calculated. As a result, employees’ taxable income decreases, which can lead to lower federal income tax and FICA (Social Security and Medicare) tax liabilities. This benefit is particularly impactful for employees in higher tax brackets.

For small business owners, the tax benefits are equally compelling. Employer contributions to a Section 125 plan are not considered taxable income to the employee, and thus, the employer is not liable for payroll taxes on these amounts. This includes savings on their portion of FICA taxes, federal unemployment taxes, and, in some cases, state unemployment taxes. By reducing the overall payroll tax burden, small business owners can use these savings to reinvest in their business, enhance employee benefits, or improve their bottom line.

Another advantage of implementing a Section 125 plan is the potential for increased employee retention and satisfaction. Offering a cafeteria plan can make a small business more competitive in the job market by enhancing the overall benefits package without significantly increasing the cost to the employer. This not only helps in attracting quality talent but also in retaining current employees, as they perceive a higher value in their compensation package.

Moreover, Section 125 plans are relatively flexible, allowing small business owners to tailor the benefits to meet the specific needs of their workforce. This flexibility can be particularly advantageous for small businesses that have a diverse employee base with varying needs and preferences.