Written by Alverta “Sandy” Steinwedel
Unlike individuals, business owners are always considering new tax strategies to help reduce their tax liability. In years past, owners considered them “loopholes” but under the current tax environment “strategies” are a better description.
Employee Benefits
With the competition among business owners to hire employees, salary is not always the answer. Adding tax saving employee benefits will show additional value to the new hire while providing tax savings to the owner. Some benefits for consideration: assistance with childcare, group life insurance, employee meals or tuition reimbursement.
Accountable Plan
With the elimination of Form 2106 for W-2 employees, many of the expenses once taken by employees on their tax return were eliminated. With an accountable plan, the employer can reimburse the employee without reporting it as income which lowers the payroll taxes for the employer.
Hire Family to Work in the Business
By hiring your children: the business income will decrease by the wages; the child who is under the age of 18 can earn up to $12,950 in 2022 without paying FICA; the owner can set up a ROTH IRA for the child for the wages paid. By hiring your spouse: the business income will decrease by the wages; family retirement contribution can increase due to additional wages.
State and Local Taxes
For S-Corporations or Partnerships, the businesses are permitted to pay state and local taxes (PTE only) for owners through the company. This is very beneficial since it avoids the $10,000 SALT limitation on Schedule A for the individual and is an expense for the business.
Health Savings Plan
Employers or taxpayers can make contributions to a Health Savings Plan if they qualify for the high deductible health plan. The employer gets the benefit of the expense, and the employee is permitted to withdraw funds tax-free for medical costs.
Qualified Business Income Deduction
Many businesses have been using the qualified business income deduction since its creation within the 2017 Tax Cuts and Jobs Act. This deduction permits self-employed or small business owners to deduct up to 20% of their qualified business income. Be aware this deduction sunsets in 2025 so it is important business owners take full advantage of the benefit. Do not postpone future income past 2025.
Qualified Charitable Contributions
Many business owners continue to work into later years. If an owner is at 72 and required to take their required minimum distribution, consider a qualified charitable contribution to a qualified charity. This must be completed by the trustee to the charity. This strategy lowers the taxable income and qualifies for the required minimum distribution by the taxpayer/business owner.
Tax planning for business owners is essential for the success of the business due to financial fluctuation throughout the year. Every business owner should consider meeting with their tax/accounting professional a minimum of twice a year.
Remember, every business is unique; therefore, it is important to meet with your tax/accounting professional before implementing any strategy discussed in this article.
