tax planning strategies for business owners

Tax Planning 101 for Small Businesses (Plus 9 Year-End Tax Planning Strategies to Consider Now)

Successful business tax planning can impact your business’s bottom line and long-term growth.
It’s important to make the most of tax write-offs and credits to lower your business’s tax liability and pay lower taxes.
Learn the best tax planning strategies for small businesses in this article from Nav’s experts to prepare for this coming tax season.

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Importance of Tax Planning for Small Businesses

Tax planning is essential for small businesses since it serves as a strategic financial tool that can significantly impact their bottom line. By proactively managing tax obligations, small business owners can unlock opportunities for cost savings and make sure that they maximize deductions, credits, and incentives available to them.

This not only results in immediate financial relief but also helps with cash flow management , allowing businesses to allocate resources more efficiently.

Furthermore, year-end tax planning enables small businesses to stay compliant with ever-evolving tax laws, reducing the risk of penalties and legal issues. Choosing the right business entity, optimizing investment strategies, and implementing retirement and succession planning are integral aspects of tax planning that contribute to the long-term financial health and sustainability of small businesses.

Ultimately, effective tax planning empowers small businesses to navigate the complexities of the tax landscape, make informed financial decisions, and position themselves for growth and success in a competitive marketplace.

Overview of Major Tax Changes That Will Impact Small Businesses in 2024

Let’s look at the major changes happening to taxes in 2024 that might affect your business.

Changes to Income Tax Rates

Annual changes to income tax rates typically occur due to various economic, fiscal, and political factors. Governments adjust income tax rates as a way to manage fiscal policy, generate revenue, address economic challenges, and respond to social and political pressures.

Also, inflation erodes the purchasing power of money over time. To account for inflation and maintain the real value of tax revenue, governments may adjust tax brackets and rates periodically.

New tax brackets for 2024

A tax bracket is a range of income levels that determines the rate at which an individual or business is taxed. As someone’s income increases and moves into a higher bracket, the applicable tax rate on that portion of income also goes up.

There are still seven tax brackets, which is the same as last year, but the income levels increased.

Changes to corporate income tax rates

The corporate tax rate is the percentage of a company’s profits that it is required to pay in taxes to the government. This tax is applied to a corporation’s taxable income — or revenue minus allowable business expenses and other deductions. This tax is paid by corporations and not other business entities, like LLCs or sole proprietorships.

The U.S. corporate income tax rate will remain the same — at 21% — in 2024. In early 2023, President Biden had proposed raising the rate to 28% . However, the proposal fell through, so it will stay steady in 2024.

Impact on small business owners’ personal income taxes

Your business’s tax impact on your personal tax returns depends on what kind of entity you run . If you’re a sole proprietor or LLC, your business taxes will automatically pass through to your personal taxes. That means you’ll file one return for both yourself and your business. As an LLC, you can choose to be taxed as a corporation if it makes the most financial sense.

Tax Deductions and Credits

Tax deductions and credits are both used to reduce a taxpayer’s overall tax liability, but they work differently.

Tax deductions : Reduce taxable income, meaning the amount of income you bring in that can be taxed. Deductions can include eligible business expenses or certain itemized deductions.
Tax credits : Directly reduce the amount of taxes owed. Credits are typically tied to specific actions, expenses, or circumstances, like education expenses, child care costs, or energy-efficient home improvements.

While deductions provide savings by lowering the taxable income, tax credits offer a dollar-for-dollar reduction in the actual tax liability.

Extension and changes to small business tax deductions

A standard tax deduction is a fixed amount that eligible taxpayers can subtract from their adjusted gross income to reduce their taxable income, simplifying the tax filing process. It serves as a baseline deduction for people who don’t itemize specific expenses like mortgage interest or charitable contributions.

In other words, if your deductions don’t exceed what’s on the list below, you’re better off taking the standard deduction.

Here are the standard deductions for 2024:

Single : $14,600 (up from $13,850)
Married filing jointly : $29,200 (up from $27,700)
Married filing separately : $14,600 (up from $13,850)
Head of household : $21,900 (up from $20,800)

Section 179 deduction

The Section 179 deduction allows businesses to deduct the full purchase price (with a maximum of $1,160,000 in 2023) of qualifying equipment and software in the year it was purchased, rather than depreciating it over time. This deduction is designed to incentivize small and medium-sized businesses to invest in capital assets, like machinery, vehicles, or office equipment. So this deduction can give you tax relief while helping you maintain your business’s property.

Qualified Business Income deduction

The Qualified Business Income deduction is a U.S. tax benefit that lets certain businesses deduct up to 20% of their qualified business income. If you own a sole proprietorship, partnership, S corporation, or a specific type of trust or estate, you may be able to get the Qualified Business Income deduction. Eligible businesses must generally operate in qualified fields and meet specific income thresholds. The deduction is designed to help small business owners and entrepreneurs by reducing their taxable income, fostering business growth, and promoting investment. According to the IRS , “the deduction is available regardless of whether taxpayers itemize deductions on Schedule A or take the standard deduction.”

New and expanded small business tax credits

It’s always good to keep an eye out for new tax credits, or those that may expand to allow you to qualify for them. Here are two important credits you may not have heard of.

Employee Retention Credit

If your business has employees, you may still qualify for the Employee Retention Credit (ERC). The ERC is a tax credit that encourages businesses, particularly those adversely affected by the COVID-19 pandemic, to hold onto their employees. Employers can claim the credit for a percentage of qualified wages paid to employees during the pandemic. Learn more in this article from Nav’s experts.

Paid Family Leave Credit

The Employer Credit for Paid Family and Medical Leave helps business owners provide paid leave to their employees for qualified family and medical reasons. Employers may be eligible for a tax credit ranging from 12.5% to 25% of the wages paid to qualifying employees during their family or medical leave, depending on the percentage of the employee’s regular wages paid during the leave period. To qualify, employers must have a written policy in place that provides at least two weeks of paid family and medical leave annually to qualifying full-time employees.

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Retirement Plans

It’s especially important as a small business owner to plan for retirement since you don’t have an employer taking out regular contributions to a retirement account. Here’s a breakdown of the changes to expect in the coming year.

Higher contribution limits for small business retirement plans

Traditional or Roth IRA : Increasing to $7,000 per year.
Solo 401(k) : Increasing to $69,000 per year with catch-up contributions remaining at $7,500.
SEP IRA : Increasing to $69,000 (or up to 25% of compensation or net self-employment earnings, whichever is less).
SIMPLE IRA : Increasing to $16,000 with catch-up contributions remaining at $3,500.

Tax benefits of setting up a retirement plan

Establishing a retirement plan for your business offers several tax advantages. First off, contributions to qualified retirement plans are typically tax-deductible for your business, which reduces its taxable income and potential overall tax liability.

Additionally, employees contributing to these plans may enjoy tax benefits, including tax-deferred growth. In cases like a Roth IRA, they’ll get tax-free withdrawals in retirement. Employers may also qualify for tax credits, like the Retirement Plan Startup Cost Tax Credit , which can help offset the cost of starting a retirement plan.

A well-designed retirement plan not only helps employees in saving for the future but also can help your business save money.

Estimated Tax Payments

Now let’s explore what small business owners need to know about estimated tax payments.

Updated IRS rules for estimated quarterly tax payments

Self-employed individuals and businesses that make enough revenue pay quarterly taxes to the government.

Here’s a brief overview of the key points:

Frequency : Quarterly tax payments are due four times a year, typically on April 15, June 15, September 15, and January 15 of the following year.
Who pays : Might include self-employed individuals, freelancers, sole proprietors, partners in partnerships, and S corporation shareholders, among others.
Calculating payments : Taxpayers estimate their annual income and deductions and calculate the estimated tax for the year. The IRS provides Form 1040-ES to help business owners do the math for their estimated tax liability.

Although there aren’t any big changes in store for 2024, it’s important to keep an eye out for possible changes in the future.

Strategies to avoid underpayment penalties

If you fail to pay (or don’t pay enough) in quarterly tax payments, you might face an underpayment penalty. Common situations leading to underpayment penalties include insufficient withholding from wages, failure to make required quarterly estimated tax payments, or significant changes in income that were not adequately addressed.

For example, you may have to pay this fine if you hand over less than 90% of the current year’s taxes. Therefore, it’s crucial for small business owners to stay informed about their tax obligations, make accurate estimated payments, and adjust their withholding to avoid potential penalties and interest on the underpaid amount.

Year-End Tax Planning Strategies

It’s important to prepare for the end of the year ahead of time based on your business structure. Working with a professional helps you stay up to date on tax changes, like the 2017 Tax Cuts and Job Act (TCJA). Whether you have a sole proprietorship, a limited liability company (LLC), an S corporation, or a C corporation, using a tax advisor, CPA, or tax software can help make sure your business taxes are accurate.

Planning ahead also provides time to organize and gather necessary documentation, which helps you make sure to file on time. Additionally, some tax-saving strategies and deductions may have specific deadlines or requirements that need to be met before the end of the tax year. Planning in advance allows businesses to take advantage of these opportunities.

Lastly, early planning helps avoid the rush and stress associated with last-minute tax preparations, reducing the risk of errors and ensuring compliance with tax regulations. Overall, strategic planning for year-end business taxes is essential for financial management, tax efficiency, and compliance with legal obligations.

Ways to reduce tax bill as a small business

There are many ways you may be able to help lower your tax bill as a small business owner, including:

Defer income : Delaying billing clients or customers until next year can lower taxable income for the current year. It’s best to do this only if you know that you’ll stay in the same tax bracket the following year.
Accelerate deductions : Making expenditures like inventory purchases, business supplies, and equipment upgrades before year-end can provide tax deductions for the current year. This can be a good idea to do one year to beat the standard deduction. The next year, you could skimp on expenses the following year and plan to spend less than the standard deduction (since you would get the same deduction no matter how much you spend).
Bonus depreciation : You can deduct up to 100% on eligible assets purchased for business purposes by December 31, which can maximize deductions.
Section 179 deduction : Deducting on qualifying equipment under Section 179 can reduce taxable income.
Retirement plan contributions : Making deductible 401(k) or SIMPLE IRA contributions by December 31 can lower business income taxed at the owner’s personal rate.
Business equipment purchases : Buying necessary equipment, property, or vehicles for the business before year-end may entitle you to valuable tax deductions and credits.
Charitable donations : Businesses can deduct qualified charitable contributions made by December 31. Consider donating inventory or services.
Tax loss harvesting : Selling investments at a loss to offset capital gains and up to $3,000 of ordinary income can lower your tax burden.
Tax estimates : If operating as a pass-through entity, carefully calculating your fourth quarter estimated payment to avoid underpayment penalties.

Summary of Major 2024 Tax Changes Impacting Small Businesses

Overall, there are a few changes that may help small business owners pay less in taxes. First, tax brackets are increasing, which means you’ll have to earn more to fall into a higher tax bracket. Also, retirement limits are higher, which means small business owners can contribute larger amounts to their retirement accounts.

These complicated changes can happen each year, which highlights why it’s essential to work with a tax professional or advisor.

How Nav Can Help

Nav is your small business partner. Don’t spend hours searching for what you need. Instead, use Nav to help you find the right software or service for business taxes that can help you maintain compliance and reduce your tax burden. Also, using the Cash Flow Health tool makes it easier to stay on top of your business’s finances and understand your borrowing power.

Tiffany Verbeck

Tiffany Verbeck is a Digital Marketing Copywriter for Nav. She uses the skills she learned from her master’s degree in writing to provide guidance to small businesses trying to navigate the ins-and-outs of financing. Previously, she ran a writing business for three years, and her work has appeared on sites like Business Insider, VaroWorth, and Mission Lane.

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19 Small Business Tax Planning Strategies to Slash Your Tax Bill [2023]

This post was originally published on February 24, 2022, and extensively updated on January 4, 2023.

As a business owner, it’s your job to take care of a host of obligations. One moment, you may be managing a human resources issue, and the next, you are coping with a customer complaint. Wearing so many different hats can make it difficult to stay on top of other, less frequent aspects of running a business, such as taxes.

19 Small Business Tax Planning Strategies to Slash Your Tax Bill [2023]

At CMP , we’re familiar with the tax challenges that businesses face. One of the most frequently asked questions we hear from our business clients is this:

What’s the best tax strategy to use for my business?

Having a tax strategy is essential because it governs everything you do and provides a framework that allows you to fulfill your tax obligations without overpaying. In this post, we will review some business tax basics and reveal 19 of the best tax strategies for business owners.

Reduce Tax Liability with These Tax Planning Strategies for Your Small Business

Now that we’ve covered some of the basics, here are 19 tax strategies to help you minimize your tax burden and save money at tax time.

1. Look for Ways to Reduce Your Adjusted Gross Income

Many of the taxes you pay are tied to your adjusted gross income or AGI. For example, if your AGI doesn’t exceed $200,000 or $250,000 if married and filing a joint return, you won’t be required to pay the additional 0.9% in Medicare taxes. You can lower your AGI by reducing your salary or doing one of the following things:

Contributing to a tax-deferred retirement plan
Itemizing deductions if they exceed your standard deduction
Contributing to a health savings plan

If you think you might want to itemize deductions, consider tracking them on a spreadsheet throughout the year. That way, you won’t need to scramble to calculate them at tax time.

2. Be Strategic with Your Tax Elections

Applying some strategies to your business expenses can help you reduce your taxable income. For example, if you acquire new business equipment or machinery, you can deduct the cost upfront up to $1 million under the 2018 tax law.

However, for new businesses or those that aren’t yet turning a profit, you may want to consider depreciation as an alternative. Depreciation allows you to deduct the value of your purchase in future tax years instead of all at once. That’s beneficial if you expect your profits to increase and push you into a higher tax bracket.

Other tips include:

Deducting home office expenses based on actual costs or the IRS simplified rate , which is $5 per square foot up to 300 square feet of space.
If your business has been impacted by a disaster, you can claim the losses on your prior year’s returns instead of the year when the disaster occurred.
You can choose between deducting vehicle expenses based on the actual cost or the IRS mileage allowance of 58.5 cents per mile from 1/1/22-6/30/2022, then at 62.5 cents per mile from 7/1/22-12/31/2022
Deduct business insurance expenses, including liability, workers’ compensation, commercial auto, and business interruption services insurance.

The IRS scrutinizes insurance deductions closely, so ask your accountant before taking deductions.

3. Rethink Your Exit Planning Strategy and Wealth Transfer Strategies

As 2022 draws to a close, it’s essential to look at economic conditions and rethink your business exit plan and wealth transfer strategies. According to Bloomberg News , there is a 100% probability of a recession sometime in 2023, which increases the importance of planning.

Here are some things you can do to minimize your tax burden and protect your business going into 2023.

Review your estimated net income . If your income is lower than expected, you may want to seek out tax credits and other tax benefits that you may not have qualified for at a higher income level. If it’s higher than expected, then you can get aggressive with deductions by making donations and finding other ways to reduce your taxable income .
Reassess your business entity . As your business income increases, it may become necessary to reconsider your business structure from a tax perspective. If you’re a sole proprietor, you may want to incorporate it as an LLC, and some LLCs may wish to apply to file as an S corporation to save money.
Optimize Your Retirement Plan . It’s possible to save thousands of dollars by offering your employees a retirement plan and using your contributions to lower your tax burden.
Evaluate Your Business Succession Plan . If you already have a business succession plan , the end of 2022 is a good time to review and make changes as needed. If you don’t have one, then you’ll need to create one to prepare your heirs for what will happen when you’re preparing to hand over the reins to them.

Working with a tax professional can help you evaluate your strategies and make the most of any opportunities to secure your business succession plan and wealth transfer strategies.

4. Acquire Assets at the End of the Year

In some tax years, it may be beneficial to estimate your business taxes and then acquire new and used assets to reduce your taxes.

The Tax Cuts and Jobs Act of 2018 allows a 100% bonus depreciation. It may be worthwhile to take advantage of it, particularly in years when your profits have been high. It is important to remember that assets you purchase must be placed in service before the end of the year.

5. Help an Employee with Student Loans

The CARES Act, which was signed into law by then-President Trump in 2020, included a provision that allows employers to assist employees with student loans. It used to be that if an employer repaid part of an employee’s student loans, the employee had to pay taxes because the payments were seen as income.

Discover how different types of income are taxed in our blog post: " Breaking Down Income Types: How Each Is Taxed ." Understanding how your income is taxed is crucial for proper financial planning. Our article comprehensively summarizes various income sources, including wages, investments, rental earnings, and more. Gain valuable insights into the tax implications of different income types, helping you confidently navigate the complex world of taxation.

The CARES Act included an exception that allows employers to get a payroll tax exemption for repaying employees’ student loans and excludes the repayments from employees’ income, meaning that they don’t have to pay taxes.

This provision will remain in effect through 2025 and presents an opportunity for employers to earn some goodwill with employees while also saving money on payroll taxes.

6. Establish Fringe Benefit Plans for Employees

When you increase employees’ wages, you also trigger higher employment tax costs. One way to get around that is to offer fringe benefits as part of employees’ compensation.

Some of the tax-exempt benefits you may want to consider include the following:

Medical and dental insurance
Long-term care insurance
Disability insurance
Group term life insurance
Childcare assistance
Tuition reimbursement
Transportation
Employee meals
Student loan payments (see above)

You can find more information about eligible fringe benefits here .

Learn More 8 Ways to Minimize Capital Gains Tax Liability

7. Take a Tax-Free Loan from Your Business

A lot of business owners don’t know that they can take out a low- or no-interest loan from their business. If the loan interest is below the Applicable Federal Rates set by the IRS, you may need to report the interest.

You can check out the current IRS set rates here . Of course, you should ask your accountant before implementing this strategy.

8. Don’t Ignore Carryover Deductions

You already know that some deductions have limitations. The same is true of tax credits , which means that you may not be able to use them fully in the current year. However, you may not be aware that some of these deductions allow a carryover to future years.

Examples of carryovers include capital losses, general business credits, home office deductions, net operating losses (up to 80% of taxable income ), and charitable contributions.

9. Use Accountable Plans

Do you reimburse your employees for things like entertainment, travel, and other costs? If you do, you may want to use an accountable plan. Using an accountable plan allows you to deduct the expenses without reporting the reimbursements as employee income. In other words, it can reduce both your employment taxes and your overall taxable income.

As a bonus, using an accountable plan can also save your employees money on taxes. That’s because, under the new tax law, employees can no longer deduct miscellaneous unreimbursed employee expenses .

10. Abandon Property Instead of Reporting it as a Capital Loss

If your business owns property that has no value, you might be tempted to sell it and report it as a capital loss on your taxes. However, there are some benefits to abandoning it instead.

Abandonment of property allows you to take an ordinary loss, which is fully deductible, instead of a capital loss, which is subject to limitations. Keep in mind that a Section 1231 property may be ordinary or capital, depending on other Section 1231 losses for the year and prior losses.

11. Defer Taxable Income

Are you using cash-method accounting for your business? If you are, you can take advantage of that by carefully managing your business taxable income to minimize your taxes. If you anticipate that your business income will be taxed at the same (or lower) rate in 2023, here are a few tips to help you defer some of your income:

Put recurring expenses on your credit card. You can deduct them in the current year even though you won’t pay the credit card bill until next year.
Mail checks a few days before the end of the year. You can deduct the expenses in the year you mail the checks. If you’re mailing a big check, use registered mail so you can prove the mailing date.
Prepay expenses at the end of the year , provided that the benefit does not exceed IRS limitations (the earlier of 12 months before the first date on which your business realizes the benefit or the end of the next tax year). For example, you could prepay your office rent or prepay some of your insurance premiums.
Delay sending invoices until the last few days of the year. That way, you’ll receive payment in the new year and can report the income in the new year as well.

You’ll need to be cautious with the last strategy. Don’t delay sending invoices to customers who pay slowly.

12. Hire Your Spouse or Children

If your spouse or children can contribute to your business, then put them on the payroll . Kids can work tax-free if their income is below the IRS threshold. The Tax Cuts and Jobs Act of 2018 nearly doubled the exemption amount for dependent minors.

As a bonus, you can take the money you pay your kids and put it into an education savings account or Roth IRA. You also won’t need to withhold payroll taxes.

13. Evaluate Your Business Entity Type

The business entity type you choose significantly impacts your tax liability. As we mentioned earlier, people who are sole proprietors, have Limited Partnerships, or certain Limited Liability Companies are on the hook to pay self-employment taxes. Depending on how much you earn as a sole proprietor or as an employee of any pass-through entity, you may also have to pay the additional 0.9% Medicare tax.

If your estimated business taxes are high, then you may want to consider taking a step back and reorganizing your business as a different type of entity . For example, reorganizing an LLC as a C corporation has some tax benefits. Navigating the ins and outs of different business entity types can be confusing, so it’s beneficial to work with a tax professional to determine the appropriate structure for your business.

14. Write Off Bad Debts

As a business owner, you may sell products or services to customers on credit. For example, many companies invoice clients and give them 15 or 30 days to pay. When you have delivered goods and services, your instinct may be to continually try to collect them, but that’s not always the most advantageous approach for taxes.

As the end of the tax year approaches, you should review your accounts, including past due invoices and loans you may have made to employees or vendors, and consider whether they should be written off as bad debt . Writing these debts off can help you to offset what you owe on your taxes and reduce your overall tax obligation. It is important to note that this applies to accrual basis taxpayers only (see below).

15. Review Your Accounting Method

There are several accounting methods you may use as a business owner, and in some cases, you may have a choice about which method to use. The two most common methods are the cash method and the accrual method.

With the cash method, you must report any money you receive and any business expenses you incur in the year you pay them. This method is available to many small businesses, but businesses that have average receipts of more than $25 million for the past three years are not eligible.

The other option is the accrual method, which allows you to report income in the year it is earned and expenses in the year they are incurred. There are benefits to both methods, and you should consult with your accountant to determine which method best suits your business needs.

16. Check If You’re Eligible for Penalty Relief

Sometimes, despite their best efforts, business owners incur a penalty from the IRS. The penalty could be because they missed a tax filing deadline or underpaid their taxes, and in some cases, the penalties can be significant.

If you incur a penalty, it is worthwhile to see if you are eligible for penalty relief . Some circumstances that may be eligible for penalty relief include:

Failing to file a tax return
Failing to pay on time
Failing to deposit taxes as required

You can check with the IRS or your accountant to find out if you are eligible for penalty relief. Often the IRS will remove the first penalty assessed to you.

17. Pay Down Your Debt

Payments you make for business expenses are not tax-deductible in most cases, but there is one exception: loan interest. If you have an outstanding business loan and cash on hand, you may want to make extra payments or even pay off the loan entirely so that you can deduct the interest when you file your tax return.

Keep in mind that the IRS does not allow an interest deduction for personal expenses paid with a credit card. You can view IRS Publication 334 for information about non-farm business interest deductions and IRS Publication 225 for information about interest deductions for farms.

18. Stay Updated on the Latest Small Business Tax Law Changes

In August of 2022, the Inflation Reduction Act was signed into law by President Joseph Biden. The law included some of the provisions that were originally part of Biden’s Build Back Better bill, which was negotiated and renegotiated throughout 2021 and into 2022.

For businesses, the most important part of that legislation is that there is now a 15% corporate minimum tax. Wall Street experts have evaluated the provision and concluded that the impact of it would be minimal since very few companies were paying less before the act’s passage.

It’s important to note that the 15% minimum tax applies only to the adjusted financial statement income of companies that pay more than $1 billion in profits to shareholders.

The Inflation Reduction Act also included a 1% excise tax to be imposed upon shares repurchased by companies after December 31, 2021. Earlier proposed changes to the Base Erosion and Anti-Abuse Tax (BEAT) and Global Intangible Low-Tax Income (GILTI) were not included in the final bill. We are always watching to see what happens with pending tax legislation, and as a business owner, you should be too.

19. Consult a Tax Advisor

One of the best things you can do as a small business owner to minimize the amount of tax you are required to pay is to consult a tax advisor. Even if you are someone who keeps a close eye on business news and stays up to date on tax law changes, you still need professional advice to help you file your taxes.

Business tax filings can be complex, and the penalties for mistakes or oversights can be high. Ultimately, paying for a tax advisor will be less expensive than trying to clean up the aftermath of a mistake with your taxes .

The AMT credit can help you avoid paying a higher tax rate by offering a dollar-to-dollar reduction on previous years' taxes. Check our blog post, Alternative Minimum Tax Explained to find out how this works.

Small Business Tax Planning FAQ

Here are a couple of questions that we often hear from clients about small business tax planning.

How Much Does a Small Business Pay in Taxes?

This is a frequently asked question because people want to know how much they will need to pay, so they can prepare and be sure to have the money they need to meet their tax obligations.

The short answer is that every small business is unique, but we can still give you some idea of what to expect. The Small Business Administration released figures that showed an average of 19.8% as the effective tax rate for small businesses. The percentages can vary depending on your business structure and other factors.

There are five basic types of taxes that business owners may need to pay. They are as follows:

Self-employment tax
Estimated tax
Employer tax

The Tax Cuts and Jobs Act of 2017 changed the tax code for corporations. As of January 1, 2018, C corporations have a flat corporate income tax rate of 21%. This rate does not apply to other business structures. You should keep in mind that if you have a sole proprietorship or partnership—and in some cases, an LLC—you may need to pay self-employment tax.

Why is Tax Planning Important for Small Businesses?

As a business owner, paying taxes is your obligation, but the amount you owe should never be a surprise. It’s essential to understand how business taxes work and estimate the amount you need to pay each quarter or year to ensure that you have the appropriate amount of money.

Tax planning is something that can help you make accurate tax estimates, make all tax filings and reports on time, and avoid the potential repercussions of not doing so. As business taxes can be complicated, we recommend working with an experienced tax professional to help you with tax planning. You should also know that tax planning is often the best way to find tax savings.

Download Now: 7 Tips for Choosing The Best Accountant For Your Business

Final Thoughts on Small Business Tax Strategies

Calculating, filing, and paying your business taxes can be a time-consuming and expensive endeavor. The 19 tax strategies we have reviewed here can help you understand your tax obligations and minimize your tax burden as you head into 2023.

Do you need assistance planning your income tax strategy ? CMP can help create an excellent tax plan for you and your business.

About Ashlyn Rodeback

As a Cache Valley native from Smithfield, Ashlyn graduated with both her bachelor’s and master’s degree in accounting with a specialization in taxation from Utah State University. Ashlyn’s primary focus is on individual and business taxation and providing clients with bookkeeping and payroll solutions. She is passionate about working with clients and helping them with their accounting, tax, and payroll needs. When not in the office helping clients, she can be found with her husband Keenan, traveling, kayaking, or watching a good show.

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Tax planning for business owners and executives for 2024

Introduction

SALT deductions

Charitable deductions, alternative minimum tax, employment and investment taxes, retirement incentives, credits and incentives, transfer tax planning, reporting and payment responsibilities.

Agility is king. The economic environment has brought nearly unprecedented volatility in recent years. COVID-19 upended long-standing business practices, but also created new investment opportunities.

Now several years out, macroeconomic factors, such as persistent inflation and high interest rates, can affect investment and tax planning strategies. The rapid changes to the tax and regulatory landscape only make tax planning more difficult.

As a business owner or executive, it’s critical you adjust your planning as conditions evolve. As income increases, so can your tax burden. Planning decisions become even more important for your long-term investments and your ability to pass your wealth on to the next generation. As 2023 closes and a new year begins, it’s the perfect time to revisit your tax situation. Tax planning means acting well before your return is due.

In this guide we’ll highlight some of the key tax considerations for business owners and executives in the current environment, including:

The impact and planning options for the SALT cap
Tax-efficient ways to leverage retirement incentives
How to manage increasing IRS scrutiny on charitable giving
The evolving rules for employment and investment taxes
The impact of the alternative minimum tax
New tax savings opportunities
Strategies for passing wealth along to heirs
Your compliance and reporting responsibilities

We’ll also cover key things you should consider doing before the year ends on Dec. 31, including:

Making any required minimum distributions from retirement accounts
Using your annual gift tax exclusion
Making all necessary withholding or estimated tax payments (individual fourth-quarter payments are due Jan. 15, 2024)

Remember, tax law changes are always possible after this guide is published, and there are many tax considerations not covered. You should check for the most up-to-date tax rules and regulations before making any tax decisions. Contact your local Grant Thornton LLP professional to discuss your situation or for an update on tax legislation.

Your tax planning should start with understanding the basic rules for income tax rates and deductions. Some of the simplest strategies about when you recognize income and deductions can profoundly affect when and how much you pay.

First, your rates. Different types of income are taxed differently. The biggest chunk of your income is likely ordinary income. It includes items like salary and bonuses, self-employment and pass-through business income and retirement plan distributions. Most types of investment income—like rents, royalties and interest—are also taxed as ordinary income. Two kinds of investment income are subject to special lower rates: qualified dividends and long-term capital gains from assets held more than one year.

The top rate on ordinary income is 37%, while the top rate on long-term capital gains and qualifying dividends is 20%, not including employment taxes and taxes on net investment income, discussed later. The Tax Cuts and Jobs Act repealed or limited many itemized deductions, but there are still many exclusions and deductions that benefit individual taxpayers. We’ve included a table with the 2023 and 2024 figures for many important tax rules and benefits.

Show image description -->

This graphic is titled Tax Benefit Thresholds and shows a comparison between 2023 and 2024 of various tax rules and benefits, including income tax standard deductions per tax category, transportation benefits (transit and parking), kiddie tax (child’s rate and parent’s rate), adoption benefits (the credit and the employer income exclusion), expatriation (income threshold for application of the tax and exclusion from the tax), Foreign earned income exclusion per person, and retirement accounts for both IRAs and 4011(k)s.

Deferring tax can be a powerful strategy, particularly with high inflation. With the time value of money, postponing a tax bill can help you generate a return that blunts the impact. The idea is to delay recognizing income while accelerating deductions. There are many items for which you may be able to control timing.

Consulting income
Self-employment income
Real estate sales
Gain on stock sales
Other property sales
Retirement plan distributions
Losses on sales of stock and other investment property
Mortgage interest
Margin interest
Charitable contributions

But be careful, certain circumstances may affect your strategy. You may want to delay an itemized deduction to bunch it with future expenses, or your tax planning may be affected by the AMT. There are also limits on deducting prepaid expenses. You will likely benefit from multiyear tax planning. Special consideration should be given to state taxes and charitable giving because of the limit on state tax deductions and the IRS scrutiny of charitable deductions.

The $10,000 cap on the individual state and local tax deduction can be painful for successful business owners and executives, particularly in years with transactions that can generate significant gain.

Owners of pass-through entities have a unique opportunity to obtain relief from the cap with the help of the business entity. To date, 36 states and one locality have enacted regimes that allow pass-through businesses to deduct SALT taxes at the entity level in exchange for a credit or exemption from state tax on the pass-through income of owners. This allows a partnership or S corporation to fully deduct state tax against entity level business income, rather than having owners pay tax themselves and take a limited SALT deduction at the individual level. It can be especially powerful in years where there is a transaction that causes significant state tax on capital gain.

The explosion in state pass-through entity (PTE) tax regimes over the last two years came partly in response to IRS guidance (Notice 2020-75) confirming the viability of the entity-level deductions. Although these regimes can offer significant benefits to owners, there are potential drawbacks. Whether electing into a PTE tax ultimately makes sense is a complex determination that depends on a variety of factors that involve both federal income tax rules as well as state tax rules.

The lack of uniformity among state laws presents particular challenges. State rules vary on when taxpayers can make an election to shift tax to the entity level. The timing of an entity-level deduction may depend both on when the election is made and when the entity makes payments for the tax. State laws also vary (and are not always clear) on whether PTE taxes paid in one state are creditable against other PTE regimes or personal income tax liability in other states.

It’s also important to understand that PTE tax elections may benefit certain owners more than others, particularly for partnerships operating across many states or with partners residing in different states. Partnerships should weigh the burdens of paying the entity-level tax against the benefits of passing the entity-level deduction to partners, and also consider whether the partnership agreement will permit any necessary adjustments to allocations or distributions. States are still updating their laws to address technical considerations. You should carefully analyze the most current state laws and fully assess the potential implications.

Charity is good for more than just the soul. It also comes with valuable tax benefits, and those benefits can be leveraged with intentional planning. It’s important to understand key limits on charitable deductions. Taxpayers should also be aware that the IRS is stepping up its scrutiny of this area.

Charitable deductions are generally limited to a percentage of adjusted gross income, with any excess carried over for the next five years. The percentage limitation can be quite complex, and depends both on whether the gift is cash or property and the type of charitable organization that receives the gift. The table below illustrates the general (adjusted gross income) AGI limits by donation and the type of charity.

This graphic is title Adjusted Gross Income Limits on Charitable Contribution Deductions and compares percentage limits on three types of charitable deductions, 1. Cash, ordinary income property and unappreciated property, 2. Long-term capital gains property deducted at fair market value and 3. Long-term capital gains property deducted at basis. The percentage limits for the three types are broken into two categories: Public charity or operating foundation and private nonoperating foundation.

Outright gifts of cash (which include gifts made by check, credit card or payroll deductions) are the easiest. Yet despite the simplicity and higher AGI limits for outright cash gifts, gifts of property may be more beneficial. It’s a little more complicated to make them, but they often provide more tax benefits when planned properly. Your deduction depends in part on the type of property donated: long-term capital gains property, ordinary income property or tangible personal property. Your deduction could also depend on what the charity plans to do with the donated property.

Ordinary income property includes items such as stock held for less than one year, inventory and property subject to depreciation recapture. You can receive a deduction equal to only the lesser of fair market value or your tax basis.

Long-term capital gains property includes stocks and other securities you’ve held more than one year. It’s one of the best charitable gifts because you can take a charitable deduction equal to its current fair market value without recognizing the gain on the property. Keep in mind that it may be better to elect to deduct the basis rather than the fair market value, because the AGI limitation will be higher. Whether this is beneficial will depend on your AGI and the likelihood of using — within the next five years — the carryover you would have if you deducted the fair market value and the 30% limit applied.

Individuals over age 70½ can make distributions from an IRA of up to $100,000 to certain charitable organizations without including the distribution on gross income, which may provide a better tax result than a charitable deduction. See the discussion under the “required distributions” section later in the guide.

Documentation

The IRS is concerned that the value of noncash gifts is being overstated, and this area is the focus of significant scrutiny.

Taxpayers are required to obtain written substantiation of the contribution with a contemporaneous written acknowledgment from the charitable organization. This requirement applies to cash gifts of over $250 and non-cash contributions of over $500. There are specific items that must be included in the acknowledgement from the charity, a description of the property contributed, a description and good faith estimate of the value of any goods or services with more than an insubstantial value received in exchange for the contribution, and if the donee provides intangible religious benefits, a statement that it provides such benefits. The IRS has successfully disallowed sizeable charitable deductions when the taxpayer has not received the proper acknowledgement in a timely fashion.

A qualified appraisal is required for noncash contributions of over $5,000. This issue is especially troublesome when the property given to charity is art or an interest in real property. This type of property can be hard to value, with disagreement possible even among appraisers. You should ensure that any appraiser selected for a valuation has the requisite experience in the specific type of property being appraised. Charitable gifts have been disallowed or limited for gifts without a proper valuation.

There are some exceptions to the appraisal requirement. The most important exception is for donations of publicly traded securities. Importantly, many digital assets are not considered traded on a public exchange. Since the assets are not considered cash either, they are generally subject to the appraisal requirement.

The IRS is also strictly enforcing procedural filing requirements, so mistakes can be costly. The IRS requires all forms to be complete and accurate and filed on time. If any section of the form is not complete, the entire charitable deduction may be disallowed.

There are several other key rules to keep mind:

If you contribute your services to charity, you can deduct only your out-of-pocket expenses, not the fair market value of your services.
You receive no deduction by donating the use of property, such as the use of a vacation property donated to a charity for an auction.
If you drive for charitable purposes, you can deduct 14 cents for each charitable mile driven.
Giving a car to charity results only in a deduction equal to what the charity receives when it sells the vehicle unless it is used by the charity in its tax-exempt function.

If you donate clothing or household goods, they must be in at least “good used condition” to be deductible.

The AMT is one of the most frustrating surprises hiding in the tax code. Just when you think you’ve figured out your taxes, you’re forced to run everything through a completely different set of calculations. The AMT is essentially a separate tax system with its own rules. The alternative minimum tax (AMT) applies to taxpayers with high economic income by setting a limit on certain tax benefits. It helps to ensure that those taxpayers pay at least a minimum amount of tax. Each year you must calculate your tax liability under the regular income tax system and the separate AMT system and pay the higher amount.

The good news is the AMT affects far fewer taxpayers than it used to thanks to the increased exemption enacted as part of the Tax Cuts and Jobs Act in 2017, as well as limits on deductions that used to be triggers for AMT, like state taxes. The bad news is that there are still millions of taxpayers affected.

The AMT has a lower top rate than the regular income tax system, with just two tax brackets of 26% and 28%, but many deductions and credits aren’t allowed against the it. Taxpayers with incomes well in excess of the exemption and with substantial deductions, or benefits that are reduced or not allowed under the AMT are the ones stuck paying it.

It’s critical to know whether you’ll be subject to the AMT before your tax return is due. You need to know if you’ll benefit from certain tax incentives before making business and investment decisions that hinge on the tax treatment. Common AMT triggers include the following:

Investment advisory fees
Incentive stock options
Interest on a home equity loan not used to build or improve your residence
Tax-exempt interest on certain private activity bonds
Accelerated depreciation adjustments and related gain or loss differences on disposition

AMT planning

There are ways to mitigate or even benefit from the AMT by leveraging its low top rate. You just need to plan. Multi-year tax planning can help you accelerate income into years when you are subject to the lower AMT rates and postpone deductions into years when you can use them against the higher regular tax rates.

Long-term capital gains and qualified dividends deserve special consideration for the AMT. They are taxed at the same 15% and 20% rates under either the AMT or regular tax structure, but the additional income they generate can reduce your AMT exemption and result in an effective rate of 20.5% instead of the normal 15% (or 25.5% for capital gains in the 20% bracket). You should consider the AMT as part of your tax analysis before selling any asset that could generate a large gain.

Your tax planning must go beyond income taxes, particularly for certain types of business and investment income. This means looking at employment taxes and the net investment income tax.

Earned income

The taxes on earned income that are used to fund Social Security and Medicare are called employment taxes because they apply to salaries, wages and bonuses. The Social Security tax on earned income is capped ($160,200 in 2023 and $168,600 in 2024), but the Medicare tax has no limit. Both employees and employers pay Medicare tax at a 1.45% rate until earned income reaches $200,000 (single) or $250,000 (joint), and then the employee rate share increases to 2.35% for a total rate of 3.8%.

The business income from sole proprietors and partners is generally self-employment income with some key exceptions, meaning self-employment tax is due on both the employee and employer share of the Medicare tax. You can take an above-the-line deduction for the employer portion of self-employment tax.

Investment income

The tax on net investment income (NII) is designed to impose an equivalent 3.8% on investment income. The tax applies to NII to the extent AGI exceeds $200,000 (single) or $250,000 (joint). NII includes rent, royalties, interest, dividends and annuities. There is an exception if the income is derived in the ordinary course of a trade or business in which you are not passive. On the other hand, all income from businesses in which you are passive is regarded as NII regardless of the type of income. In addition, income from trading in financial instruments is always NII.

Business owners

It’s important to consider the employment taxes and NII together, particularly for business owners. If you have to pay employment or self-employment tax on a stream of income, it is not included in NII. You never have to pay both taxes on the same income. Self-employment tax provides a better result because of the deduction for the employer share of tax. There may be limited situations in which neither tax will apply.

Owners of S corporations who are not passive in the business must take a reasonable salary and pay employment tax on wages, but they otherwise may not face self-employment tax or NII on their pro rata share of income of the S corporation.

The treatment of partners for self-employment taxes is more complex and is one to which the IRS is giving increased scrutiny (e.g., the IRS has launched an audit campaign). The issue revolves around an exception from self-employment tax under Section 1402(a)(13) for the distributive share of partnership income of a “limited partner.” Partners can potentially avoid self-employment tax on their distributive share of partnership income if they can establish they are limited partners. But for this position to benefit the partners, they would also need to exclude the income from the NII tax by being active in the business.

Since the Tax Court ruled in favor of the IRS in Renkemeyer, Campbell, & Weaver, LLP v. Commissioner (136 T.C. 137) in 2011, it has become much more difficult for taxpayers to argue that they are both limited partners in a partnership while also being active enough in the business to avoid passive treatment. The Tax Court analysis established in Renkemeyer looks less at legal liability and more at whether activities the partner engages in are consistent with the general concept of a “limited partner.” The Tax Court has applied this analysis to LLCs and other entities organized as a partnerships, but several cases in litigation would address entities that are established as limited partnerships under local law.

The IRS is actively litigating the issue whether a person who is a limited partner under a state law limited partnership statute qualifies for the limited partner exception to SECA with regard to the partner’s distributive share of partnership income. The treatment of income for employment and investment tax purposes for limited partners may hinge on the outcome of three cases in the Tax Court involving investment management funds— Denham Capital Management LP v. Commissioner , Point72 Asset Management LP v. Commissioner , both pending, and Soroban Capital Partners LP v. Commissioner , in which the Tax Court issued its first opinion (responding to motions for summary judgement) in late November 2023.

The recent opinion in Soroban is noteworthy for the Tax Court’s rejection of the taxpayer’s argument that under the plain meaning of the statute, limited partners of state law limited partnerships are not subject to SECA tax on their distributive share allocations of income as a matter of law. The Tax Court denied Soroban’s motion for summary judgment and held that the determination of eligibility for the limited partner exception requires a “functional analysis test to determine whether a partner in a state law limited partnership is a ‘limited partner, as such." The Soroban decision did not address what a functional analysis would include or provide details on how it might be applied. Depending on the procedural route that the parties take, the court’s final resolution in Soroban might provide much needed insight as to how to apply a functional analysis to a taxpayer’s particular facts.

The IRS has signaled that it is actively considering regulations to address the issue. It originally proposed regulations in 1997, but never finalized them after they were heavily criticized, and Congress enacted a one-year moratorium on their finalization. In the last couple of years, the IRS had seemed to place the limited partner exception as a lower priority in its guidance projects, but in the fall of 2023, indicated that it was making the topic a priority guidance item. Ultimately, under judicial and administrative authorities, it may be very difficult to have a position that escapes both self-employment tax and NII at the same time. In addition, Democrats have proposed legislation that would generally close the gap between self-employment tax and NII tax, though it is not likely to be enacted in the near-term.

Retirement planning as a successful business owner or executive is often less about retirement and more about leveraging some of the best incentives the tax code has to offer. Several recent legislative changes have made retirement tax rules even more generous. Anyone with a substantial portfolio should be carefully assessing where investments are held in order to take advantage of the significant savings offered by tax-preferred retirement vehicles.

Employer accounts

Employer-sponsored defined contribution accounts like Section 401(k) plans have several advantages over IRAs, which are generally maintained by an individual. For one, many employers offer matching contributions, and there are no income limits for contributing. The tax benefits of these accounts in the traditional versions are twofold: Contributions generally reduce your current taxable income, and assets in the accounts grow tax-deferred — meaning you will pay no income tax until you receive distributions. Contributing the maximum amount allowed ($22,500 in 2023 and $23,000 in 2024) is usually a smart move. That also means making full catch-up contributions when you reach age 50.

The limit on catch-up contributions for qualified retirement plans reached $7,500 in 2023, and under recent legislation, taxpayers aged 60 to 63 will benefit from an increased limit beginning in 2025. But there’s a catch. Taxpayers with wages exceeding $145,000 will eventually be required to make all catch-up contributions on a Roth basis. This provision was originally scheduled to take effect in 2024, but the IRS delayed it until 2026.

Individual IRAs have some limits that can make them harder for high-income taxpayers to use. Contributions to traditional IRAs aren’t deductible above certain income thresholds if you’re offered a retirement plan through your employer. The good news is that recent legislation repealed the 70½-year age cap on contributing to an IRA. The age for required minimum distributions has also increased, discussed more later.

IRAs have other advantages. You have more flexibility over how you invest and you can even self-direct an IRA. If you’re above the deductibility threshold, you can also consider making nondeductible contributions and then rolling over into a Roth version.

Roth accounts

Both qualified retirement plans and IRAs offer Roth versions. The tax benefits of Roth accounts differ slightly from those of traditional accounts. Roth accounts allow for tax-free growth and tax-free distributions, but contributions are neither pretax nor deductible.

The difference is in when you pay the tax. With a traditional retirement account, you get a tax break on the contributions: You pay taxes only on the back end when you withdraw your money. For a Roth account, you get no tax break on the contributions up front, but you never pay tax again if distributions are made properly.

There is an income limit for making Roth contributions to an IRA, but you can manage the issue by making nondeductible contributions to a traditional IRA and then rolling it over. There are potential pitfalls. Rolling over from a traditional IRA that received both deductible contributions and nondeductible contributions will create pro rata rollover in which some of the funds will be considered to come from deductible contributions, resulting in tax and potentially early withdrawal penalties.

Required distributions

You must begin making annual minimum withdrawals from most retirement accounts when reaching a certain age, but that age keeps rising under recent legislation. The age was recently set at 72, but is now 73 for those turning 73 in 2023 and later. It will rise to 75 for those turning 75 in 2033.

Required minimum distributions (RMDs) are calculated using your account balance and a life-expectancy table. They must be made each year by Dec. 31 or you are subject to a 50% penalty on the amount you should have withdrawn. If you are already subject to these rules, you should check to make sure you have fulfilled them before the end of this year to avoid steep penalties. You may not be required to make distributions if you’re still working for the employer who sponsors your plan.

Inherited IRAs

Taxpayers that inherit an IRA have separate distribution rules. These rules recently changed under legislation that applies to IRAs inherited from an account holder who died in 2020 or later. If you inherit an IRA from a spouse, you have more options, including rolling over into your own IRA or taking distributions based on your own life expectancy. Most other taxpayers are now required to empty the account within 10 years even if they are under the age for required minimum distributions. When you must begin making distributions under this 10-year rule is still in flux. The IRS initially proposed regulations holding that if the account holder had already reached the RMD age, then the beneficiary would be required to make distributions each year during this 10-year period. The IRS has provided transition relief, however, providing that taxpayers will not be penalized taxpayers for not making these distributions in 2021, 2022 and 2023.

Planning options

Consider leaving as much as possible in your tax-preferred retirement accounts except what is required to fulfill the RMD rules. Your investments inside the accounts are growing tax-free and you are deferring the tax on the income that occurs when you do distribute (except for Roth versions, which aren’t included in tax at distribution). If you can afford to, spend the money you have invested outside of tax-preferred accounts first to protect as much of your portfolio from tax as you can as long as you can. And if you die with money remaining in your IRA, your heirs can continue to defer tax on the income even longer.

You can also consider making a tax-free charitable contribution out of an IRA to satisfy the RMD rules.

This can save you more than making a taxable distribution and separately taking a charitable deduction for any gifts. A charitable deduction can be reduced by limitations and phaseouts, and erases taxable income only after you’ve already calculated your AGI. When you instead make the gift straight from an IRA distribution, the amount of the gift is not included in income at all, lowering your AGI. A lower AGI not only directly reduces the amount of income subject to tax, but also blunts the effect of many AGI-based limits and phaseouts.

Congress has loaded the code with tax incentives meant to spur specific types of business activity and investments. Some of the programs can offer valuable opportunities for individual investors, including energy credit transfers and opportunity zones.

Opportunity zones

The opportunity zone program allows individuals to defer the recognition of capital gains if within six months of selling the assets, they invest an equal amount in an opportunity zone fund. The fund must be dedicated to investing in the areas that a state has designated as an opportunity zone. The deferred gain is not recognized until the opportunity zone investment is sold or by Dec. 31, 2026, at the latest.

The even more powerful incentive kicks in if the opportunity zone investment is held for at least 10 years. If that’s the case, you recognize no gain on any appreciation of the opportunity zone investment itself. The two benefits combine to create a powerful tax benefit and there is no shortage of opportunities to use it. There are more than 8,700 census tracts that qualify as opportunity zones, including multiple tracts in every major U.S. city and many areas ripe for development.

There are strict rules for how the investment must be made, and complex requirement the funds themselves must fulfill in order for investors to enjoy the tax benefits.

Energy credit transfers

The Inflation Reduction Act created a new regime to allow taxpayers to monetize energy credits by selling them to unrelated parties. Taxpayers with significant tax bills can consider whether to buy energy credit at a discount to reduce their tax bill. A robust market is developing where some credits are selling at 85% to 95% of their value.

There are some very important risks and limitations, especially for individuals. For one, the buyer of a credit retains significant risk if the IRS audits and disputes the amount of the credit or if there is recapture of the credit from a change in ownership. Indemnification clauses and tax insurance can help mitigate these risks but can also come with transaction costs that reduce the return.

More importantly for individuals, the initial IRS guidance provides that the credit will be considered a passive activity credit, so individuals will only be able to benefit if they have tax from a passive activity. The credit is also subject to other limitations that apply at the individual level to limit credit usage. The IRS rules are only proposed for now, so it’s possible that more favorable rules are offered later to make the credit market more attractive for individuals.

The favorable estate, gift, and generation-skipping transfer tax lifetime exclusions, which reached $12.92 million in 2023, and $13.61 million in 2024, have greatly reduced the number of taxpayers potentially subject to estate and gift taxes. It’s important to keep in mind, however, that these thresholds are scheduled to be cut in half in 2026 without any new legislation. Successful business owners and executives could find themselves unexpectedly exposed for potential estate and gift tax.

The IRS has issued helpful guidance allowing taxpayers to leverage the current exemptions without fear of future changes clawing back the benefit. The rules provide that the estate tax can be determined using the exemption amount allocated to gifts made during the increased exemption period or the exemption amount at the time of death, whichever is greater. Taxpayers who do not take advantage of the increased exemptions with gifts before 2026 could forfeit the benefit of the increased exemptions.

The current high interest rates complicate estate tax planning. Many transfer tax strategies hinge on the ability of assets to appreciate faster than interest rates prescribed by the IRS. Taxpayers should consider the current outlook for interest rate and the types of assets that are most likely to appreciate in the current environment.

Leveraging the annual gift tax exclusion is another key opportunity for taxpayers that may be subject transfer taxes. The annual exclusion reached $17,000 in 2023 and is set to increase to $18,000 in 2024. You can double the 2023 exclusion to $34,000 by electing to split gifts with a spouse. So even if you want to give to just four individuals, you and a spouse could give a total of $136,000 this year with no gift tax consequences. If you have more people you’d like to benefit, you can remove even more money from your estate every year. Consider whether you have opportunities to use the 2023 exclusion by Dec. 31 before it’s forfeited.

The IRS imposes scores of reporting and payment requirements, and failure to comply can be costly. High-income taxpayers, business owners, and investors with international activity face even greater exposure. Some key requirements you should keep in mind include:

Payments: Taxpayers are responsible for paying tax throughout the year through withholding and estimated tax payments. If your adjusted gross income is $150,000 or more, you must generally pay either 90% of current year tax throughout the year or 110% of prior year tax. Consider checking your withholding and estimated tax payments before year-end. If you’re in danger of an underpayment penalty, try to make up the shortfall by increasing withholding on your salary or bonuses. A bigger estimated tax payment can leave you exposed to penalties for previous quarters, while withholding is considered to have been paid ratably throughout the year.
FBAR: Treasury generally requires taxpayers with financial interest in or signature authority over a foreign financial account that exceeds $10,000 to file an FBAR by April 15. The penalties for noncompliance can be significant, and can be imposed on business owners or executives that have authority over a business account.
Beneficial ownership: The Corporate Transparency Act enacted in 2021 will require many corporations, limited liability corporations, and other entities formed or registered to do business in the U.S. to report their beneficial owners. The new rules will become effective Jan. 1, 2024, and filings can be required within 90 days of creation for companies formed in 2024. Companies formed before 2024 will have until Jan. 1 2025, to report.
Foreign gifts and trusts: Transactions with foreign trusts and the receipt of certain foreign gifts may require informational reporting to the IRS on Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, or 3520A, Annual Information Return of Foreign Trust With a U.S. Owner. The penalties for noncompliance can be significant and the list of transactions that need to be reported is long. For example, the use of property owned by a foreign trust or a loan form a foreign trust may be subject to the reporting rules.

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Principal Practice Leader, Tax Technical, Washington National Tax Office

Grace Kim has more than 20 years of experience in the area of partnership taxation, which includes IRS, law firm and accounting firm positions. Her diversified experience includes working on a broad range of structuring and operational issues in a variety of industries and areas.

Washington DC, Washington DC

Construction & real estate
Manufacturing, Transportation & Distribution
Private equity

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Strategic federal tax

Bradley Roe

Managing Director, Private Wealth Services

Brad Roe leads the Private Wealth Services practice in the Houston office. Roe has more than 28 years of professional experience working with high net worth individuals and families, closely held businesses, trusts and estates.

Houston, Texas

Private Wealth Services

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Tax Planning for Business Owners: 15 Strategies to Consider

As a business owner, you work incredibly hard to build your company and serve your customers. But complex tax codes mean there may be overlooked opportunities to potentially reduce your tax liability - money left on the table that could have stayed in your pocket. Proper tax planning is essential for business owners looking to maximize growth and true profits .

In our meetings with business owner clients, we discuss everything from little-known credits and deductions to setting up the optimal corporate structure and benefits packages to legally seek to minimize the taxes you pay.

Here are the 15 actionable tax planning strategies business owners should consider and review each year.

Read on to discover creative tax savings approaches that could pay dividends for your bottom line for years to come.

Table of Contents:

Understanding Qualified Opportunity Zones
Potentially Maximizing Benefits with Section 179 Accelerated Depreciation
Establishing a Cash Balance Plan
The Strategy of Tax-Loss Harvesting
Financial Benefits of Paying Your Children
Utilizing the Augusta Rule
Qualified Plan Review and Funding
Leveraging Cost Segregation
Exploring R&D Tax Credits
Overall Savings Strategy Review
Making the Most of HSAs
Maximizing Charitable Contributions
Understanding Mega Backdoor Roth Conversion
The Importance of Working with a CPA
Reviewing Your Benefits Package
Your Next Tax Planning Steps

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Understanding qualified opportunity zones .

Senior Wealth Advisor Drew Allen, CFP®, CLU®, CEPA, ChFC®, RICP® and CEO David Silver CFP®, CEPA® discuss Qualified Opportunity Zones.

Qualified Opportunity Zones (QOZs) were created under the 2017 Tax Cuts and Jobs Act as a way to incentivize investment in underserved communities. Here’s how they work to potentially benefit both investors and communities:

What Are Qualified Opportunity Zones?

Qualified Opportunity Zones are economically distressed areas that meet certain income and poverty thresholds. Each state governor has the ability to nominate a certain number of census tracts to become federally certified QOZs.

The Potential Benefits of Investing in Qualified Opportunity Funds

Those who invest capital gains into Qualified Opportunity Funds that are set up to invest in QOZ businesses and properties could receive substantial tax incentives:

Eliminate 10% of the deferred capital gains tax if invested for at least 5 years
Eliminate 15% of the deferred capital gains tax if invested for at least 7 years
If held at least 10 years, eliminate new gains realized from the QOZ investment*

**From IRS.Gov: If the investor holds the investment in the QOF for at least 10 years, the investor is eligible to elect to adjust the basis of the QOF investment to its fair market value on the date that the QOF investment is sold or exchanged.

This allows investors to potentially compound money over the long-term in low income areas that need the capital.

How to Invest in Qualified Opportunity Zones

To receive QOZ tax incentives, taxpayers must:

Generate a capital gain from another investment (can be stocks, bonds, real estate sale, etc.)
Reinvest that capital gain within 180 days into a Qualified Opportunity Fund
Hold the investment in the Opportunity Fund for at least 5-7 years*

*Note: As mentioned above, if held 10 years, the investor can also eliminate all capital gains taxes realized from the QOZ asset (the investor will still owe taxes on the original asset)

Opportunity Funds pool money and invest specifically in businesses, real estate deals, and other assets located within federally designated Qualified Opportunity Zones.

Potentially Maximizing Benefits with Section 179 Accelerated Depreciation

Senior Wealth Advisor Drew Allen, CFP®, CLU®, CEPA, ChFC®, RICP® and CEO David Silver CFP®, CEPA® share insights on Section 179 for business owners.

Section 179 allows business owners to fully deduct the purchase cost of eligible capital assets in the first year, rather than slowly depreciating deductions over several years. This could provide an immediate boost in tax savings and cash flow in the current tax year.

For example, rather than only deducting 20% depreciation on a $50,000 vehicle purchase each year for 5 years under normal depreciation, the full $50,000 could be expensed via Section 179 in Year 1.

Section 179 Eligible Properties & Limits

What capital assets qualify for section 179.

To take the Section 179 deduction on capital expenditures, the equipment must be purchased for active business use rather than passive investment purposes. Common eligible Section 179 property includes:

Vehicles, machinery, and computers
Software, office equipment, and appliances
Some building improvements like HVAC and lighting

Section 179 Deduction Limits

There is an overall annual dollar limitation on the total Section 179 deduction available, as well as limits on deductions for specific asset types. For 2023, business owners can deduct*:

Up to $1,160,000 in total Section 179 equipment purchases

*See IRS.gov article here on Section 179

Consult an accountant to review eligible purchases and seek to maximize your Section 179 deduction under current limits.

Establishing a Cash Balance Plan

A cash balance plan is a defined benefit retirement plan that functions similarly to a 401(k) but offers substantially higher contribution limits for business owners and key employees.

Each participant receives an annual pay credit contribution from the employer (based on salary and age) which grows over time with interest credits.

This allows older business owners to potentially save exponentially more for retirement in tax-advantaged accounts than 401(k)s and IRAs permit – over $300,000 per year in some cases.

Benefits for Business Owners

Cash balance plans provide major tax deductions and a fixed rate of return on contributions. Differentiators include:

Much higher annual contribution limits than other retirement plans
Contributions are at the employer’s discretion each year
Allowed to change or stop contributions if business needs cash
Tax deductible for the business as compensation expense
Funds grow tax-deferred with mandatory interest credits
Moderately flexible for rewarding key employees

A cash balance plan paired with a 401(k) can allow business owners over age 50 to put away over $400,000 annually in tax-deductible retirement savings.

Does a cash balance plan strategy make sense for you and your unique situation? We recommend consulting a financial advisor to help you sort through the different options available to you.

The Strategy of Tax-Loss Harvesting

Tax-loss harvesting is the strategic selling of investments, such as stocks or mutual funds, at a loss to offset capital gains taxes.

By realizing losses, this reduces tax liability on any gains realized elsewhere in a portfolio. The sold security can then be repurchased after 30 days if still desired.

Potential Benefits of Tax-Loss Harvesting

Savvy investors utilize tax-loss harvesting to help save significantly on their tax bills. Potential benefits include:

Offsetting realized capital gains from other sales
Offsetting up to $3,000 in ordinary income annually
Carrying forward unused capital losses to offset taxes in future years
Diversify portfolios away from declining positions
Ability to repurchase sold assets after 30 days

Over long time horizons, this could add up to major tax savings.

How to Implement Tax-Loss Harvesting

Work closely with a tax professional to effectively utilize this strategy by:
Evaluating portfolio for tax lots trading below cost basis
Selling losing positions for capital losses
Using losses to offset gains and lower net tax liability
Considering rebalancing portfolio away from losing holdings
Repurchasing desired liquidated positions after 30 days

Be aware of “wash sale rules” that disallow claiming a tax loss if buying back substantially identical securities within 30 days of selling.

Tax-loss harvesting takes careful planning and timing but could be an excellent tax reduction tool.

Financial Benefits of Paying Your Children

Employing your children in a family business or paying them for work as an independent contractor could provide worthwhile income for them as well as tax deductions for your business. But special rules and limits apply, so proper planning is key.

Legal Considerations

Children must complete legitimate work to justify pay
Need to pay market wages relative to duties
Must comply with state and federal labor laws
Need employment or independent contractor agreement

Document hours worked and responsibilities to demonstrate evidence in case of any legal challenge.

Potential Tax Benefits and Limits

As long as legitimate pay requirements are met, potential benefits include:

Tax deduction as wages or contract labor costs
Avoid payroll taxes on children under age 18
Income to the child is income tax free up to the standard deduction 13,900 in 2023
If used to fund a Roth IRA up to the annual limit of 6,500 in 2023, the growth can be tax free as well

However, pay must remain reasonable compared to duties and meet IRS standards. Excessive pay can result in partial or total loss of deductions plus penalties.

We recommend consulting a tax professional to ensure you remain compliant while benefiting your family and business.

Utilizing the Augusta Rule

The Augusta Rule, known in the tax code as Section 280A, allows homeowners to rent out their primary residence to their own business for up to 14 days per year without needing to claim the rental income personally.

So for example, a business owner could:

Rent their home to their own corporation for a company party, business meeting, etc.
The corporation can claim a tax deduction on that rental expense
Meanwhile, the homeowner does not have to report that rental income personally

This essentially allows business owners to get a deduction through their company for the use of their home, while also letting them receive that rental income tax-free individually by keeping it under 14 days per year.

Section 280A provides a commonly overlooked deduction opportunity. Business owners simply need to ensure the home rental stays within 14 days annually for business meetings, parties, planning sessions etc to take advantage tax-free.

Qualified Plan Review and Funding

Retirement plans like 401(k)s and pensions provide major tax savings for business owners. But laws change, plans evolve, and opportunities arise to contribute more. That’s why ongoing reviews are critical.

Importance of Qualified Plan Reviews

Annual qualified plan reviews help uncover:

New or increased tax deduction opportunities
Plan design limitations to address
Opportunities to reward key employees
Funding shortfalls requiring catch-up contributions
Updated compliance issues or regulatory changes

Significant tax and retirement savings can be gained from ongoing plan optimization and funding adjustments.

Strategies for Optimal Funding

Work closely with your financial advisor or accountant to analyze your current qualified retirement plans. Strategies may include:

Increasing company match percentages as profits grow
Contributing the annual profit sharing maximum
Running annual catch-up contribution calculations
Seeing if a Cash Balance Plan could complement current offerings
Determining if key executives can afford to save more pre-tax

The time invested in an annual review could lead to maximized savings for both the company and your future self. Don’t leave these crucial tax-advantaged investment vehicles running on auto-pilot.

Leveraging Cost Segregation

Cost segregation is an often overlooked tax strategy for real estate investors and business property owners that can generate major depreciation deductions.

What is Cost Segregation?

Cost segregation is an IRS approved method of reclassifying components of a commercial property into shorter depreciable life categories. This accelerates tax deductions compared to traditional straight-line depreciation.

For example, parts of a building like wiring, plumbing, and HVAC systems can get bumped from a 39 year schedule to 5-7 years. This essentially pulls forward deductions into earlier years.

Potential Benefits for Property Owners

Owners who utilize cost segregation could enjoy major benefits including:

Accelerating depreciation tax deductions into earlier years
Increasing annual cash flow with lower tax liability
Potentially qualifying for Section 179 deductions on portions of the property
Potentially maximizing deductions upon sale with proven lower basis

This all could lead to substantial tax savings and increased cash flow in the early years of a property investment. A commercial real estate CPA can assess if cost segregation makes sense for your property. Proper implementation can yield hundreds of thousands in tax savings.

Exploring R&D Tax Credits

Many businesses are eligible for substantial tax credits related to research and development activities without realizing it.

Eligibility for R&D Tax Credits

Contrary to what many believe, R&D tax credits don’t just apply to formal scientific or medical research. Eligible activities include:

Software development
Design and prototype creation
Testing/quality control processes
Exploring alternative materials, devices, or processes
Developing or improving products and manufacturing procedures

Essentially, exploring uncertainty in attempts to develop improved products, processes, performance, reliability, or quality can qualify.

How to Claim the Credit

While rules can be complex to fully maximize claims, the four basic steps are:

Document activities tied to uncertainty and experimentation
Identify costs associated with these R&D efforts
Calculate the applicable credit based on costs
Claim the credit to receive the tax refund

Most companies are performing many more eligible activities than they realize. A tax professional who specializes in R&Ds can assess qualifications and file your R&D tax credit.

The reward for this under-the-radar incentive could potentially equate to hundreds of thousands back to reinvest and grow your business.

Overall Savings Strategy Review

Reviewing your entire savings strategy annually provides huge potentially opportunities to better position assets in more tax-advantaged accounts or investments.

Assessing Current Savings Strategies

A proper review analyzes:

Tax efficiency of current investment asset allocation - For example, determining whether too much income is being generated needlessly in taxable accounts versus strategically locating high dividend stocks solely within IRAs.
Fees and expenses paid within accounts - Quantifying total costs for account administration, trading commissions, expense ratios, and advisors allows assessment of reasonability and potentially negotiating reductions.
Fund location optimization (taxable vs non-taxable accounts) - Determining if adjustments are prudent such as holding only municipal bonds and non-dividend growth stocks in taxable accounts while prioritizing high yield bonds
Maximization of tax-preferred account contributions - For example, ensuring backdoor Roth IRA conversions are done each year, catching up on any deferred 401k contribution room, and exploiting qualified plan and HSA limits before taxable savings.

This allows refinement and improvement for amplified growth.

Recommendations for Improvement

After thorough analysis, recommendations may include:

Consolidating accounts with duplicative investments
Maximizing HSA, 401(k), IRA use before taxable accounts
Asset location to balance taxes
Implementing direct indexing investing

Work with a savvy financial advisor to regularly review strategies and determine if any revisions or tweaks need to be made.

Making the Most of HSAs

When used strategically, Health Savings Accounts offer a triple tax advantage. Yet most Americans with access don’t maximize them.

HSA Benefits

HSAs offer unique benefits including:

Tax deductible contributions
Tax-deferred growth
Tax-free withdrawals for medical expenses

Funds roll over year after year for future health costs. After age 65, money can get withdrawn for any purpose with just ordinary tax owed.

Maximizing Contributions

Consider strategies like:

Contributing annual IRS maximums - For 2024, that means putting in $4,150 for individual coverage or $8,300 for a family, which could yield significant tax savings over time. (See IRS.Gov article here for more information)
Investing rather than cash savings - Once an emergency fund is set aside, remaining HSA balances can be invested to allow for market growth rather than stagnant cash interest, helping to amplify the account over decades.
Paying medical expenses out of pocket to grow balance - While HSAs can be used to pay current healthcare costs, allowing the account to keep growing instead could build significant savings for future medical needs in retirement.
Letting it compound into retirement - Given their unique triple tax benefits, maximizing HSAs early on and never tapping them helps allow exponential growth so they can greatly supplement retirement healthcare costs.

Be sure to save all medical receipts. When strategically leveraged, HSAs could contribute significantly in growing long-term wealth.

Charitable Contributions

Strategically planning charitable gifting allows potentially maximizing tax deductions while furthering your philanthropic impact.

Tax Implications

Items to evaluate with an advisor include:

Annual income level and related deduction caps - Higher income earners are limited to a maximum 60% AGI deduction annually, whereas lower income filers have fewer restrictions.
Carryforward rules on excess deductions - If income changes cause a spike in donations beyond typical limits, the 5 year carryforward provision allows stretching excess contributions.
Itemizing deductions vs. standard deduction impact - For those close to the standard deduction threshold, strategic bundling of charitable giving into certain years can help maximize overall deductions claimed.
Appreciated asset gifting to bypass capital gains tax - By donating stocks directly to charity instead of selling, both the capital gains tax is avoided and a fair market value deduction can be claimed.

Strategic Gifting Ideas & Tactics

Additional avenues to explore include:

Donor advised funds offering immediate deductions with grant flexibility - These qualified intermediaries seek to provide maximum deductions now while allowing more control over distributing funds to various charities over time.
Qualified charitable distributions from IRA accounts - QCDs provide efficient charitable gifting directly from IRA accounts to satisfy RMDs without triggering income taxation on withdrawals
Multi-year gifting providing current year deductions - By gifting multiple years worth up front, deductions get maximized in one tax year through a series of post-dated checks or via donor advised account

There are many ways to give. Depending on your situation, you may have options that are more tax-efficient and should be considered to accomplish your charitable goals.

The Importance of Working with a CPA

While tax software and trying to optimize deductions on your own can work for simple tax situations, most business owners need professional guidance to help maximize savings.

Potential Benefits of Professional Advice

An experienced CPA can provide:

Guidance on ever-changing regulations and obscure loopholes
Strategies seeking to leave no deductions unclaimed
Potentially significant tax savings typically dwarfing their fees
Helping avoid compliance mistakes resulting in penalties
Proactive planning and advisory products
Potential time savings over trying to self-navigate complex tax codes

Even basic planning like expense categorization can be optimized by a professional.

How to Choose the Right CPA

You probably have your own preferences for working relationships, but we recommend looking for a responsive CPA who:

Specializes in your type/size of business
Takes an active advisory role year-round
Communicates complex concepts clearly
Has reasonable and transparent fee structure
Is respected by peers and clients they have retained

Investing in a CPA could yield dividends through maximized deductions, avoided penalties, and significant time savings. Make sure to run an annual tax planning meeting involving your financial advisor to help ensure continuity in your strategy.

Reviewing Your Benefits Package

An employee benefits package consists of various non-wage compensations companies offer to retain top talent. Structuring these creatively presents potential tax optimization opportunities.

Key Components of Benefits Packages

Typical benefits may encompass:

Health, dental, and vision insurance
Retirement plan contributions
Additional PTO, leave, and work schedule flexibility
Educational assistance programs
Child care and family support resources
Wellness programs, gym discounts, and more

Providing competitive benefits can reduce turnover. Optimizing them can create recruitment advantages and tax savings.

Tax Implications and Potential Opportunities

Analyze your current offerings and structure considering:

Tax treatment of various benefit types - For instance, certain wellness-related benefits can qualify for preferred deductibility while others like gym discounts may provide more employee satisfaction than bottom line company savings.
Classes of employees/executives who qualify - Customizing offerings with preferences and limits between employee tiers, such as offering an executive health plan or restricting tuition assistance maximums by tenure, provides added control.
Annual limit thresholds and discrimination testing - Rules generally prevent benefits from overly favoring highly compensated employees, with testing required to prove annual compensation remains balanced by the plan’s design.
Which benefits employees value most - Surveying staff needs and assessing industry benchmarks on popular offerings provides insight into which benefits foster the highest perceived value and thus retention, recruitment and talent optimization per dollar spent.

Understanding Mega Backdoor Roth Conversions

The Mega Backdoor Roth Conversion allows high-income earning employees to contribute well beyond typical 401(k) limits into a Roth account with tax-free growth potential.

What is a Mega Backdoor Roth?

A Mega Backdoor Roth involves making non-Roth after-tax contributions to a 401(k) plan up to $61,000 annually. These after-tax dollars can then get rolled over into a Roth IRA annually.

This provides a way to get up to $41,000 more into tax-advantaged Roth accounts per year than the standard $20,500 pre-tax 401(k) limits.

Steps to Implement and Potential Benefits

The process involves:

Making maximum $20,500 salary deferral 401(k) contribution
Contributing after-tax dollars to 401(k) up to $61,000 total
Converting after-tax portion to Roth IRA shortly after each contribution

This advanced strategy requires employer plan allowance but allows potentially amplifying Roth retirement savings significantly.

Consultation with a knowledgeable financial planner is key for successful implementation and potentially maximizing contributions. When leveraged fully over decades, the Mega Backdoor Roth could unlock enormous tax-free growth potential for retirement.

Your Next Tax Planning Steps

Implementing comprehensive business tax minimization strategies requires advanced planning, but the long-term savings can be substantial.

With constantly evolving regulations and ambiguity in complex tax code applications, one-time planning is not enough. Work closely with both expert CPAs and financial advisors to analyze savings opportunities in an ongoing, comprehensive fashion.

Being proactive allows responding to regulatory changes with continuity in optimized overall tax reduction approach year after year. An annual review also uncovers easy-to-implement savings strategies hiding in plain sight.

Have a question about your specific situation or want to talk to one of our team members here at Instrumental Wealth? Schedule a meeting here.

We look forward to speaking with you!

Not an Offer: This document does not constitute advice or a recommendation or offer to sell or a solicitation to deal in any security or financial product. It is provided for information purposes only and on the understanding that the recipient has sufficient knowledge and experience to be able to understand and make their own evaluation of the proposals and services described herein, any risks associated therewith and any related legal, tax, accounting or other material considerations. To the extent that the reader has any questions regarding the applicability of any specific issue discussed above to their specific portfolio or situation, prospective investors are encouraged to contact Instrumental Wealth or consult with the professional advisor of their choosing.

Instrumental Wealth, LLC (“Instrumental Wealth”) is an SEC registered investment adviser located in Florida. Registration does not imply a certain level of skill or training. Instrumental Wealth may only transact business in those states in which it is notice filed or qualifies for an exemption from notice filing requirements. Information about Instrumental Wealth (inculcating its services, fees, and registration status) is available on the SEC’s IAPD website at www.adviserinfo.sec.gov. There is no guarantee that the views and opinions expressed in this presentation will come to pass. Advisory services are only offered to clients or prospective clients where Instrumental Wealth and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Instrumental Wealth unless a client service agreement is in place.

Section 179 Bonus Depreciation in 2024: Tax Planning for Business Owners

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Year-End Tax Planning for Your Business: 8 Strategies to Consider

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A business owner talks reviews taxes and reporting on laptop in her restaurant

Business leaders could lower taxes for this year by deferring income and accelerating spending. Or they could lower taxes for next year by doing the opposite: collecting more income and delaying spending. Here's what to know about other year-end tax moves worth considering, including contributing to workplace retirement plans, investing in equipment and using energy tax credits. Launch this on-demand webcast for more insights: Strategies for Surviving Year-End Reporting .

The end of the year is arguably the most important time for tax planning. It's your last chance to make decisions that will affect your company's tax return.

As leaders gear up for 2024, organizations are facing additional year-end tax planning considerations. Not only do businesses need to plan around new workplace trends following the COVID-19 pandemic, but major tax changes will be going into place soon due to the 2022 Inflation Reduction Act and the end of pandemic-relief measures.

If you're not sure what move to make first, you're not alone. This checklist of eight year-end tax planning strategies from ADP's tax credits team can help.

1. Deferring income and expenses

Whether revenue will count toward this year's tax return or next year's depends on when it was earned. If you'd like to pay less in taxes for your upcoming return, you could defer some income from December so it's counted in January.

Your method for deferring income will depend on your organization's accounting system for recognizing revenue, which was selected when the business was established. If you use the cash system, which considers income earned when you receive payment, you could delay sending out some invoices until after the new year. If you use an accrual system, which recognizes revenue after you complete a job for a client, you could delay some shipments or wait to finish off projects until January.

On the other hand, if you have a lot of unused deductions for the year, it may make sense to accelerate your efforts so you can put those deductions to good use. In this case, you would do the opposite — either send out invoices early or move to complete shipments and projects before the end of the year.

You could do the same with expenses as well. If you'd like to potentially reduce your taxes this year, you could prepay expenses like rent or suppliers under the cash system. Under the accrual system, you would agree to new expenses, like signing a contract to buy new equipment for your business, even if payment isn't due until next year.

Steps to reduce taxes this year

Delay sending out invoices to clients
Prepay rent, suppliers and other expenses before year-end
Postpone projects or shipments until next year
Agree to more business purchases, even if you can delay payment

Steps to reduce taxes next year

Send out invoices and ask to get paid before year-end
Delay paying rent, suppliers and other expenses until next year
Complete projects or shipments before year-end
Delay business investments until next year, even those that don't require payment

2. Investing in equipment

You may want to consider deducting the entire purchase price of certain tools and appliances from your taxes using the Section 179 deduction as detailed by the IRS. You can use this deduction when you purchase equipment, tools, vehicles and technology for your business.

Thanks to the Tax Cuts and Jobs Act of 2017 , the IRS allows you to deduct up to 100% of a purchase, up to $1.16 million per year, to account for qualified purchases of property for your business. If you spend more than $1.16 million, you can also claim a temporary deduction called bonus depreciation. This would allow you to potentially deduct 80% of your 2023 investment in equipment.

With bonus depreciation, you need to deduct all assets in the same category at once; you can't pick and choose as you can with the Section 179 deduction. For example, if you deduct the entire cost of one vehicle upfront, you'd need to deduct the cost of all vehicles purchased in the year.

Starting in 2023, the upfront bonus depreciation deduction begins to decrease , going from 80% in 2023 and reducing by 20% a year until it's scheduled to be gone in 2027. That would mean spreading the equipment purchase deduction over years for the expected use of the asset rather than claiming the whole thing at once.

If you haven't reached this limit yet and have more investments in mind, consider pursuing them before the end of the year if you'd like to use the full upfront deduction.

3. Contributing to retirement plans

If you offer a workplace retirement plan like a 401(k), December 31 is the final date for you and your employees to make contributions for the year. Make sure everyone is aware of this deadline so that they can make any final retirement investments before the new year.

If you want to reduce your own personal tax bill, adding money to your 401(k) account is a simple way to earn another deduction while developing your nest egg. In tax year 2023, you and your employees could have contributed if you were younger than 50 and $30,000 if you were 50 or older.

4. Maximizing energy tax credits

There are also several energy tax credits available each year. These include tax credits for:

Buying energy-efficient vehicles
The Section 179D deduction for building energy-efficient upgrades
The solar panel investment credit
Rebates for energy-efficient appliances

The Inflation Reduction Act of 2022 extended the use of (and in some cases enhanced) these tax credits so they are still available in 2023 and beyond. Making these changes before the end of the year could drastically improve your tax situation, and the upgrades would also be positive contributions to the state of the environment.

5. Coordinating with remote employees

The rise of remote employees has become a major interest for tax authorities since the global health crisis began in 2020. If you have employees working from home, they could potentially be working anywhere, including in a different state. This could create new tax responsibilities for your business .

When an employee works from home in another state, you may need to register and withhold payroll taxes for that state government. It depends on what agreements they have in place with the state where your business is located. Your remote employee might also trigger other responsibilities for your business in another state. For instance, you might need to register for licenses and permits in that other state. You might also end up owing them corporate income and/or sales taxes because of the work performed there.

What further complicates the situation is that when employees are remote, they could be moving to different locations throughout the year. For example, they may work for a month from a ski resort in Utah, which could trigger the need to collect payroll taxes for that location as well. If you have remote employees, you should:

Let your staff know why it's so important for you to know their location. Consider requiring approval before they relocate to another state.
Ask every employee to share their location during the year, including temporary visits.
Add up their days in each location.
Share this information with your tax advisor to see if there are any new tax responsibilities. You may also qualify for new tax incentives for creating jobs in another area.
Register with any new state governments to collect payroll taxes or handle other requirements.

6. Looking ahead to new 2024 tax benefits

The Inflation Reduction Act created a couple of significant new tax benefits for 2023 that your business may be able to use. First, it doubled the size of the small business research and development (R&D) tax credit . If your business invests money on qualified research activities to drive innovation and growth, you can use that expense to offset the employer portion of Social Security and Medicare taxes. To use this credit, your business must have less than $5 million in revenue and must have only been earning revenue for less than five years. Before, the maximum credit was worth $250,000 per year. In 2023, it will be $500,000. If you invest in R&D, you might consider how to increase your budget to use the larger credit next year.

Additionally, the Inflation Reduction Act extended the Affordable Care Act's premium subsidies for employees earning over 400% of the poverty limit through 2025. You do not need to change anything to manage your workplace health insurance plan. You still need to report health insurance amounts for employees on Form 1095-C each year. However, you may want to let your workforce know that they will continue receiving this government help with their premiums.

The Inflation Reduction Act has also made many of its newly enacted energy credits, as well as some pre-existing energy credits, tradeable by the parties who generate the credits. Though guidance on how a transfer will work is not yet available, a taxpayer can now purchase energy credits from an unrelated party to reduce its Federal income tax liability.

Alert: Possible state payroll tax increases

Most states are falling below their reserve requirements for unemployment insurance. In the near future, they likely will need to increase their tax revenue to meet federal requirements. Approximately 10 states are also in the position of possibly losing a federal credit for unemployment taxes, which would increase what in-state employers would need to collect.

If these changes go through, the amount your business owes for payroll taxes could increase. Consider speaking with your tax planner or payroll provider to see whether these government changes are something you need to budget for.

7. Preparing for more tax audits

The IRS audit rate has fallen steadily over the past few years. However, this looks set to change in 2023 and beyond. The Inflation Reduction Act is set to increase funding for the IRS by $80 billion over the next 10 years, with more than half of that money going toward extra enforcement, such as audits . Both businesses and business owners are more likely than average to face an audit.

State revenue agencies could also be looking for more enforcement, especially regarding new challenges like remote workers. This is all the more reason to get your year-end tax planning right.

There is an upside, though. All this extra funding should give the IRS more resources to answer questions and handle taxpayer services. If you've struggled with reaching the IRS in the past, it could become easier in the future.

8. Meeting with your tax planner

As you prepare for the end of the year, you may want to consider meeting with your tax advisor. Together, you should:

Go over your bookkeeping to ensure that all of your profit and loss figures have been recorded and updated.
Estimate how much you'll owe in taxes and whether you'll receive a refund or owe money.
Discuss other year-end tax planning strategies and deduction opportunities you might not have considered.
Review new laws that launched in 2023 and their implications for your business.
Start preparing your tax strategy for 2024.

As you move toward the end of December, consider pursuing these moves so you can celebrate the holidays with the knowledge that your business will be in excellent shape for the upcoming tax season.

For a further review of recent year-end tax planning changes, launch ADP's on-demand webcast anytime: Strategies for Surviving Year-End Reporting .

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7 Smart Small Business Tax Planning Strategies to Help You Save Money

Small business owner working on taxes on computer

Tax season can be one of the most stressful parts of running a small business, but it’s also one of the most important. Smart tax planning creates a strong foundation for business success. By strategically managing taxes, small business owners can save money, maintain legal compliance and pave the way for long-term growth.

Let’s explore some tax strategies small business owners can use to not just survive tax season, but to save money and establish the groundwork for business success.

1. Choose the Right Business Structure

Your business structure can have a big impact on your taxes. Each option comes with different tax implications that are important to understand. It can be beneficial to consult a tax professional who can help you determine the right business structure and what it means for your taxes.

Sole Proprietorships. If your business operates as a sole proprietorship , your business income will be reported on your personal tax return. This is because sole proprietorships are not separate legal entities. When tax time rolls around, you’ll need to file a Schedule C (Form 1040) to report profits and losses from your business as well as a Schedule SE (Form 1040 or Form 1040-SR) to report your Social Security and Medicare taxes. You bear full responsibility for any taxes, debts and legal issues that may arise.

Partnerships. Partnerships are known as pass-through entities, meaning the business itself doesn’t pay income tax. Similarly to a sole proprietorship, profits and losses are passed on to the individual partners, who then report their respective shares on their personal tax returns.

LLC. A limited liability company (LLC) is a separate legal entity and there is some flexibility when filing taxes . The IRS will allow qualifying LLCs to file as a sole proprietorship or partnership and be included in the owners’ personal tax return — or they can file as an S corporation or C corporation if the LLC has elected to be taxed as such. S corps and C corps can offer tax advantages for certain businesses, but they can have more complex tax filings.

2. Make the Most of Your Tax Deductions

A deduction reduces the amount of business income that can be taxed, and identifying and documenting your deductions can help you save a significant amount of money. You can maximize your deductions by carefully keeping track of your business expenses. Staying organized, keeping up to date with tax laws and consulting a tax professional can help you make the most of your deductions.

Here are few common business deductions:

Home office deductions.
Internet and phone expenses.
Travel and entertainment.
Education expenses.
Professional fees.

3. See if You Qualify for Any Tax Credits

Tax credits are another way you can save money on taxes. Unlike deductions which reduce your taxable income, tax credits directly reduce the amount of taxes you owe. Here are a few common tax credits your business may be able to take advantage of.

Work Opportunity Tax Credit (WOTC). This provides a tax credit to companies that hire individuals from certain targeted groups who have faced barriers to employment.
Small Employer Health Insurance Credit. Businesses that offer health coverage to their employees can claim this tax credit to offset the cost.
Clean energy credits. If your business invests in clean energy projects, you may be eligible for a tax credit.

You can find a full list of business credits and deductions on the IRS website.

4. Defer or Accelerate Your Income

Deferring income.

If you had a really successful year, you may want to consider deferring your business income until the following tax year. This helps reduce the amount of income that you’ll need to pay taxes on. Depending on your accounting style this can look different.

Cash-based businesses. In cash-based accounting, transactions are recorded when cash changes hands. To defer income and create tax savings, you simply postpone billing or hold off on invoicing and receiving payments.

Accrual-based businesses. Accrual-based accounting records transactions when they happen. For example, if you provide a service to a client in March but don’t receive the invoice payment until April, the income would be recorded in March. It can be trickier to defer income when you use this system — you’ll need to adjust when your services are provided or products delivered.

Income Acceleration

There are a few reasons you may want to think about accelerating your business income. It can be beneficial if you think you’ll be in a higher tax bracket next year, or if you want to take advantage of certain deductions, credits or tax benefits that may not be available later on. By recognizing income early, you could potentially lower your tax liability over the long term. Consulting with a tax professional can help you make the right moves.

5. Set Up or Contribute to a Retirement Plan

Retirement plans can help you save money on your taxes in a few different ways.

Personal taxable income. Contributions to a traditional 401(k) or other qualified retirement account can be deducted from your personal taxable income. This can help you get a lower tax bill.
Payroll taxes. A matching contribution to a retirement plan doesn’t require you to pay payroll taxes on the amount your employer contributes. This makes it a cost-efficient way to compensate employees.
Corporate tax bill. You may be able to deduct tax-deductible employer contributions and some fees to the institutions that manage the retirement plan from your tax bill.
Retirement Plans Startup Costs Tax Credit. You may qualify for a tax credit when you set up a new qualified plan such as a SEP-IRA, SIMPLE IRA or 401(k).

6. Write Off Your Equipment and Real Estate Purchases

The IRS allows small businesses to write off the cost of certain types of equipment and property over a period of years through depreciation deductions. This type of dedication can provide significant tax savings.

Section 179 Deduction. This deduction allows you to deduct the full cost of some types of equipment or property up to a certain dollar amount. The maximum deduction is around $1 million and may be adjusted annually.

Bonus depreciation. This tax incentive allows you a higher depreciation deduction in the first year after you’ve purchased qualifying equipment or property. This aims to encourage businesses to invest in growth.

7. Hire a Tax Advisor

Tax strategies are complicated. Tax laws change constantly and many regulations only apply to certain scenarios and types of businesses. A tax advisor can help guide you through this process and help you make the best decisions to lower your tax burden and set your business up for success. Here are a few ways they can help.

Stay up to date on the tax changes that may impact your business.
Ensure you stay compliant with local, state, and federal requirements.
Help you through audits and disputes.
Help develop a long-term tax strategy in line with your business goals.
Advise you on how business decisions can impact your taxes

Here’s What the Experts Have to Say

“My number one tip to help small business owners save money on taxes is to keep good books and records!

“I can’t tell you how many small businesses don’t keep up their bookkeeping, much less a profit and loss statement.

“Remember, you can’t deduct an expense if you don’t remember you incurred it, and that’s where bookkeeping — which is a record of all of your business’ transactions during the year (so nothing gets forgotten) — comes in.

“Also, small business owners should keep in mind that bookkeeping is much easier if one has a dedicated business bank account for their business!

“There are so many low-cost and even free options when it comes to business bank accounts these days that you really have no excuse but to stop running your business income and expenses through your personal bank account and start running them through a proper business bank account!”

Logan Allec, CPA Choice Tax Relief

“Maximizing deductions is one of the most important, if not the most important, tax-saving strategy there is. There are so many different types of deductions available to you as a business owner, including many you’ve probably never considered and even more you’re not taking full advantage of.

“First, let’s cover what it actually means to maximize deductions. Because chances are, you’ve probably heard a myth or two about this.

“A lot of business owners are told that to save on taxes, they need to go out and buy things.

“Go buy a truck” (that you don’t need)

“Go buy a new TV for the office” (that you don’t need)

“This is not true. Saving on taxes is about maximizing deductions not by adding unnecessary expenses but by finding business purposes in your regular spending.

“Pulling this off comes down to the difference between after-tax and pre-tax dollars.

“Every time you spend after-tax dollars that could have been pre-tax dollars, you lose. Every time you turn after-tax dollars into pre-tax dollars, you win.

“This is something I’m always saying to business owners. Here’s what I mean.

“After-Tax Dollars

“After-tax dollars are money you spend after paying taxes on it.

“For example, as a W-2 employee, taxes are taken out of your gross wages before they get to you. You’re then paid whatever’s left. Your take-home pay is “after-tax” dollars.

“If you then go and buy a desk and chair for your home office for this W-2 job, you’re using after-tax dollars and getting no tax deduction for these expenses.

“Pre-Tax Dollars

“Pre-tax dollars are money you spend before being taxed. Pre-tax expenses offer upfront tax advantages.

“For example, as a business owner, you have your sales or revenue—what you make—and your business expenses—what you spend. The business expenses offset the revenue and you’re left with a profit, which is taxed.

“Spending on business expenses is considered “pre-tax” because the money has not yet been taxed. This is an incredible advantage for you as a business owner.

“Let’s go back to that same example we discussed earlier but now look at it from a business owner perspective. That home office you use contains many partially-deductible expenses, including utilities, internet, maintenance, and even lawn care. That desk and chair you bought are also deductible.

“The Takeaway

“Spending money on your business can save you money on your taxes because you’re using pre-tax dollars that would otherwise be after-tax dollars. This is why you should always be on the lookout for business purposes in your everyday spending to qualify for more deductions.

“Here’s an important mantra: The goal as a business owner is to turn as many after-tax dollars into pre-tax dollars as legally possible.

“This is the foundation to hundreds of tax strategies.”

Mike Jesowshek, CPA www.TaxSavingsPodcast.com www.TaxElm.com

“The top tip for small business owners to save on taxes is to strategically plan taxes like they plan their business operations and finances. Business tax planning is a crucial part of overall financial strategy. Beyond claiming deductions and credits, it involves choosing or optimizing your business tax classification when it’s time to do it.

“For example, if you are an LLC, your default tax classification is a partnership or a sole proprietorship, depending on the number of partners. If you are starting your business, you’ll probably have many uncertainties surrounding your income level, growth strategy, and operational activities. In that case, sticking with the default LLC tax classification might be your best option.

“However, if you have a stable income stream and earn enough money to pay yourself as an “employer” and an “employee” in your company, converting a partnership or a sole proprietorship into an S corporation could lower your taxes. Why? This move potentially mitigates social security and Medicare taxes, as these obligations are based solely on the “reasonable salary” rather than all your taxable income.

“On the other hand, if you plan to reinvest all or most of the business profits back into the business, a C corporation might be a better choice than the default LLC tax classifications. By becoming a C corporation, you can take advantage of lower corporate tax rates on retained earnings, allowing you to reinvest more money into the business while potentially reducing your immediate tax liabilities.”

Ines Zemelman, EA https://tfx.tax/

This content is for informational purposes only. OnDeck and its affiliates do not provide tax, accounting, financial or legal advice. Consult your professional advisors before making financial decisions.

Article Contributors

Logan Allec, CPA

Logan Allec is a CPA and founder of tax relief company Choice Tax Relief , where he negotiates on behalf of small business owners who are struggling with significant income, payroll, or sales tax debt or multiple years of unfiled tax returns.

Mike Jesowshek, CPA

Mike is a true expert in making tax savings simple for small business owners. As an entrepreneur, speaker, author, and podcast host, he's all about breaking down the complex world of taxes into easy-to-understand strategies. Mike's main goal? To help you, the business owner, learn how to pay the least amount in taxes as legally possible. Having educated thousands of entrepreneurs nationwide, Mike's expertise makes navigating tax savings not just accessible, but a pivotal step towards business growth and enhanced wealth.

Ines Zemelman, EA

Ines Zemelman is the Founder and President of TFX . The company offers high-quality and personable tax services to individuals and businesses subject to the US tax system, regardless of location. Mrs. Zemelman is an accredited enrolled agent (EA) with over 30 years of experience in US Business, International, and Expatriate Taxation. She graduated from Baruch College (NYC), where she studied Accounting, and she holds an MBA in Taxation.

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Business Owners Need Tax Planning Strategies More Than Ever

A landmark tax case before the U.S. Supreme Court about unrealized gains underscores business owners’ need for tax mitigation planning.

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The U.S. Supreme Court has agreed to hear a landmark tax law case this fall, highlighting again the ever-changing extreme complexity of federal tax law. The case underscores an unfortunate reality: Businesspeople need a tax mitigation plan just as critically as they do a financial plan, a succession plan or an estate plan .

Marketing to Women Could Be a Business Owner’s Best Decision

And most don’t have one. There are 50 to 60 common strategies that can help reduce a taxpayer’s overall tax rate, and decisions about their usage are generally left in the hands of the owner’s CPA firm. But accounting firms tend to be very compliance-oriented and also highly risk-averse. That means they’re generally not looking at these important financial decisions in the same way a typical entrepreneur or company founder would.

Regardless of how the Supreme Court rules on the case this fall — which concerns whether taxes can be assessed on income before cash is realized — the two political parties, the IRS and tax courts will continue to pump out regulations that can consume 40% of a business's working capital.

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Business owners must assess how aggressive they want to be

With numbers that big in play, the only responsible choice is to manage tax obligations closely. How aggressively to do so becomes a critical risk/reward assessment exercise for business owners.

Tax mitigation strategies simply take advantage of the way the federal tax code is structured to lessen the amount of taxes owed. They fall into four broad categories:

Entity structuring. Strategies concerning the way your business entity is legally constituted, held, distributes income and is taxed.
Pre-tax expenditures. Strategies focused on ensuring proper expenses and compensation are paid with less expensive pre-tax dollars.
Tax-free income. Approaches for generating income that by legislation or regulation are free from taxation.
Wealth accumulation. Strategies that may allow assets to appreciate/accumulate with lowered or deferred taxation.

Most require significant proactivity on the taxpayer’s part (like making a contribution, purchasing an asset, rolling over an investment, etc.). Most also have some level of IRS compliance risk.

How Should a Small Business Plan for Rising Taxes?

How to evaluate that risk? The first thing I tell business owners interested in minimizing their tax liabilities is that, while the word “aggressive” is something most accountants don’t want to hear, it is also a word you will never find in the tax code. Instead, the word that matters most is “legal.” Is what you are doing within the scope of the law, and do you have the documentation to prove it?

Significance of potential savings could justify audit risk

Some strategies, for instance, are known irritants to the IRS and cause them to take a harder look at a given return. That usually means an audit, and obviously not every business owner wants to make such a process more likely. The significant potential savings, however, can be sufficient to justify the potential time and expense of audit compliance.

To find resources that can help proactively develop sophisticated tax mitigation strategies, talk to other company owners you know who think about risk and reward in similar ways to the way you do. See what they're doing and who they've worked with to develop their approach.

In the end, it’s the taxpayer, not their accountant, who has to take the initiative to lower their tax bill. Using (or forgoing) a tax mitigation strategy isn’t an accounting question but a business decision .

While it may seem counterintuitive, the moves by the Biden administration to expand funding for IRS enforcement may lower the cost of proactive tax mitigation strategies. For those already likely to be targeted for audit, there’s little incentive to avoid audit-triggering strategies.

For Business Owners, Estate and Exit Planning Join Forces

All this IRS action will put more business owners in a fighting mood. And given that, seeing business owners working harder to keep more of their company’s earnings is likely to become more common.

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA .

Bruce Willey has been working with small to midsize businesses across the country for more than a decade, helping them navigate business and tax law in a variety of situations. His services include assisting with business start-ups, operations, growth, asset protection, exit planning and estate planning.

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Key takeaways

It’s important to keep detailed and organized records of the money coming in and out of your business to help calculate and substantiate your tax obligations.
While your specific tax situation is likely to be as unique as your business itself, in general, many of the nuts and bolts of your taxes depend heavily on the type of business entity you’re operating.
An accountant or tax professional can guide you through the specific requirements for your business and help you respond to any changes in tax regulations.

Contributors

China Llanos

Digital Content Writer & Editor, J.P. Morgan Wealth Management

Business owners are bound to encounter plenty of challenges along the path to success – whether it’s attracting top employees, minimizing costs or determining the best way to grow. But no matter what type of business you run, filing taxes can be one of the more daunting tasks you face during the year.

Fulfilling your tax obligations in a way that’s efficient and beneficial for your business might seem like an uphill battle. Luckily, some careful planning and preparation can help make the climb more manageable.

Speaking with a tax professional who can help you determine the best strategy for your business can help you remain compliant and successful, and you should consult a tax professional before making decisions about how to structure and strategize for your business. For now, here are some general tips to help your business get ready to tackle tax season.

Gathering your tax documents

Your tax situation is likely to be as unique as your business itself. But there are some common documents that you’ll want to have on hand to help tax season go more smoothly.

First and foremost, it’s important to maintain a detailed log of the money coming in and out of your business. You may decide to use an accounting software platform to streamline your bookkeeping. 1

Even if you have an electronic system in place, items like sales slips, bills, invoices, receipts and canceled checks are generally key supporting documents for calculating and validating your tax filings. You’ll want to organize these records and keep them in a safe place. 2

Here are some specific kinds of documents that you should keep tabs on. 3

Gross receipts: The total income coming into your business will be a big factor in determining your tax picture. Evidence of your inflows might include cash register tapes, records of cash and credit sales, receipt books, invoices and 1099-MISC forms.
Purchases: You’ll also need records of any items you buy and resell to your customers, including the materials or parts you use to produce finished products. You should keep track of documents showing, amongst other things, the amount you paid, the payee and a description of what you bought.
Expenses: These are other costs you pay to run your business – and may range from office supplies to utilities and rent payments (just to name a few). Supporting documents may include checks, receipts, credit card statements and invoices.
Travel, transportation, entertainment and gifts: If you’re taking any tax deductions for these items, you’ll generally need a “paper trail” to substantiate your business-related purchases.
Assets: The property (including machinery, furniture and other things) you own and use to run your business provides its own set of recordkeeping challenges. You’ll generally need detailed records – such as purchase and sales invoices, real estate closing statements and proof of payment, etc. – to calculate things like annual depreciation and gains or losses if you sell these assets.
Employment taxes: If you have employees, there are specific records you’ll need to keep for employment tax purposes. Amongst other important things, you’ll generally need to keep track of your payroll records, including documents showing wages, benefits and withholding. 4

Tailoring your taxes to your business structure

Recordkeeping may have a lot of similarities across the business landscape, but some of the nuts and bolts of your taxes may depend heavily on the type of business entity you’re running.

Let’s look at a few common business entities and some of their basic tax features:

Sole proprietorship: As a sole proprietor, you own and operate your unincorporated business as an individual (or, possibly, as a married couple). There’s generally no legal distinction between the business owner and the business. 5 Come tax time, you generally report your business income and losses on your personal U.S. federal income tax return (using Schedule C). (Bear in mind that there may be other applicable taxes and tax filing requirements as well, such as with respect to earnings from self-employment). 6
Limited Liability Company (LLC): This type of entity may provide some flexibility in determining the tax treatment of your business. As a default, the IRS generally treats domestic LLCs with two or more members as a partnership for U.S. federal income tax purposes, meaning income and losses of the LLC are “passed through” to the owners (who each report their share on their personal U.S. federal income tax return). 7 When there’s only one member, the domestic LLC is generally treated by default as an entity that is disregarded as separate from its owner for U.S. federal income tax purposes (similarly to a sole proprietorship). Alternatively, the LLC can generally choose to be treated as a corporation for U.S. federal income tax purposes. An eligible LLC can generally change its classification by filing an election using IRS Form 8832 (but be aware of the timing and effective date requirements that may apply as well as the tax implications of making a change). Different tax treatments and considerations may apply depending on the context (including, for example, for state and local tax purposes). 8
Limited partnership (LP): A limited partnership generally includes a general partner that is responsible for managing the business activities of the partnership and one or more limited partners that have a financial interest but not control over the management of the business. The general partner generally has unlimited liability for the obligations of the partnership, while the limited partner(s) have limited liability. 9 For U.S. federal income tax purposes, the partnership files an annual information return using IRS Form 1065, and each partner receives Schedule K-1 reflecting their share of the LP’s income and losses (and other items such as certain credits and deductions) to report on their individual U.S. federal income return. Again, different tax treatments and considerations may apply depending on the context (including, for example, for state and local tax purposes). 10
C Corporation: Unlike some of the other entity types discussed here, an entity treated as a C Corporation is a tax-paying entity itself rather than a pass-through entity. This means that income of the C corporation may be subject to double taxation – the company is required to pay U.S. federal income taxes at the entity level, and shareholders are also subject to U.S. federal income taxes on the income when it is distributed as dividends. However, C Corporations may offer certain other benefits, including limited liability for shareholders and potential advantages when it comes to setting up certain employee stock ownership plans. 11 This type of company is generally required to file a U.S. federal income tax return using IRS Form 1120 annually. As always, keep in mind that C Corporations may also be subject to state and local taxes and filing requirements. 12
S Corporation: Operating this type of entity generally allows shareholders the benefit of a single level of taxation afforded to a pass-through entity for U.S. federal income tax purposes, while retaining some of the benefits of incorporation – provided it meets certain requirements. 13 Be aware that the tax rules applicable to S Corporations are complicated and the requirements can be challenging to meet and maintain. S Corporations generally file their annual U.S. federal income tax return using IRS Form 1120-S, and, much like partnerships, they provide Schedule K-1 to shareholders to enable the shareholders to report the relevant amounts on their individual returns. Don’t forget about other potential tax considerations, such as state and local requirements, too. 14

If you are interested in learning more about other business entities and whether a different structure could make sense for your business, you can learn more here . You should consider talking to your tax advisor before making important transactions or decisions about structuring.

The bottom line

There are lots of moving parts involved in running a business, and staying on top of your taxes can be among the most formidable and time-consuming tasks for a business owner. However, try not to be overwhelmed – keeping the necessary records and adapting your tax plan to your business structure can help you navigate tax season.

Well in advance of any deadlines, it can be indispensable to work with an accountant or tax professional who can guide you through the specific requirements for your business and help you respond to any changes in tax laws, rules or regulations. Now might be the perfect time to grab those IRS forms, organize your invoices and receipts and consult with an expert so that you can tackle Tax Day like a pro.

IRS. “What kind of records should I keep.” (March 2023).

J.P. Morgan Wealth Management. “Understanding business entities.” (December 2023).

IRS. “About Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship).” (February 2024).

IRS. “Limited Liability Company (LLC).” (November 2023).

IRS. “About Form 1065, U.S. Return of Partnership Income.” (February 2024).

J.P. Morgan Wealth Management. “Understanding business entities.” (December 2023).

IRS. “About Form 1120, U.S. Corporation Income Tax Return.” (February 2024).

IRS. “About Form 1120-S, U.S. Income Tax Return for an S Corporation.” (February 2024).

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7 Ways Small Business Owners Can Reduce Their Tax Bill

You can reduce your tax obligations as a small business owner through several potential money saving opportunities.

7 ways to lower your tax bill as a small business owner

1. pay for health insurance, 2. save for retirement, 3. claim the qualified business income deduction, 4. using your car for business purposes, 5. depreciation expense, 6. home office deduction, 7. financing costs for the business, employ tax planning for your small business.

Owning a small business means wearing multiple hats. You’re likely more focused on running the business than optimizing your tax efficiency. However, you’ve got several options for lowering your tax bill through popular small business tax deductions. In turn, you can reinvest these savings back into your business.

Below are seven small business tax deductions you can use to lower your tax bill.

There’s no denying it, buying health insurance can be costly. Fortunately, the IRS has special advantages for self-employed people who pay for their own insurance. If you work for yourself and pay for your own health insurance, you may be able to lower your tax bill.

Workers who receive health insurance coverage through their employer often share the cost of those premiums. But if you work for yourself as a freelancer, independent contractor, gig worker or generally as a self-employed person–and you can’t receive health insurance coverage through your spouse–you may be able to claim the self-employed health insurance deduction.

If you meet the requirements for claiming this deduction, you may be able to deduct all or part of your insurance premium. The adjustment you claim is typically limited to your net profit from the trade or business under which the insurance plan is established. This can lower your tax bill, saving you money each year you qualify for claiming the deduction.

The deductibility extends to self-employed individuals for medical, dental, vision and long-term care insurance premiums. You can also claim the deduction for your spouse or any qualifying dependents age 26 or younger at the end of the tax year.

As a small business owner, you have several tax-advantaged retirement savings options to consider for maximizing your retirement savings and reaping tax benefits. If you are self-employed without any employees, you might consider establishing a single-participant 401(k) plan, often called a “Solo 401(k).” This allows you to save up to 100% of your income as an employee contribution, up to the annual limit. In addition to the employee contribution, you might also be eligible for an employer contribution based on your net income from self-employment.

In 2023, you may be able to contribute up to $66,000 to your solo 401(k), up from $61,000 in 2022. Additionally, the limit is increased by an extra $7,500 if you’re 50 or older through a catch-up contribution .

Another option to consider is the Self-Employed Person Individual Retirement Account, or SEP IRA. This retirement account allows you to save up to 25% of your income in the account and has similar contribution limits as a solo 401(k) ($66,000 and an additional $7,500 for those age 50 or older for 2023).

You’d want to consider a Solo 401(k) if you’re self-employed or working a side gig in addition to your primary employment because you can often set aside more money than through your employer’s retirement plan.

You’ve also got the ability to contribute to Traditional and Roth IRAs, potentially further lowering your tax bill.

And if these tax savings aren’t enticing enough, you may also be eligible for claiming the Saver’s Credit worth up to $1,000 ($2,000 married filing jointly) just for contributing to your retirement account. The Saver’s Credit can be claimed for your contributions to a 401k, 403(b), 457 plan, a Simple IRA or a SEP IRA. Your contributions to a traditional IRA or a Roth IRA are also eligible for the Saver’s Credit.

If you report business income on your personal tax return, you may be eligible to claim the qualified business income deduction , also known as the Section 199A deduction. Entities eligible to claim the qualified business income deduction include:

Sole proprietorships
Partnerships
Limited liability companies (LLCs)
S corporations

The qualified business income deduction allows eligible self-employed people and small business owners to deduct up to 20% of their qualified business income on their taxes. Generally, if your taxable income is under $170,050 for single filers or $340,100 for joint filers in 2022 or $182,100 and $364,200 in 2023, respectively, you may qualify. If you earn more than your applicable income limit, you may receive a prorated deduction.

If you meet the above requirements, you’ll also need to understand what goes into your “qualified business income.” Generally, the IRS defines it as “the net amount of qualified items of income, gain, deduction and loss with respect to any trade or business.” That means income, gains, losses and expenses incurred as part of your business.

What it doesn’t mean is:

Capital gains or losses
Interest income
Income earned outside the U.S.
Certain wage and guaranteed payments made to partners and shareholders

If your business is considered a specified service trade or business , the Section 199A deduction does not apply when taxable income is above $464,200 for joint filers and $232,100 for other filers in 2023. If your taxable income is between $364,200 and $464,200 for joint filers and between $182,100 and $232,100 for other filers, claiming the deduction is partially allowed as a specified service trade or business. Examples of specified service trade or business include doctors, lawyers, financial planners, consultants and other professional services.

Depending on the nature of your business, you may need to drive as part of your work. If you choose to buy a company vehicle, it could result in lower taxes through deductions the IRS makes available to small businesses.

You can generally figure the amount of your deductible car expense by using one of two methods:

Standard mileage rate. The IRS allows you to deduct expenses related to operating and maintaining your business vehicle per mile driven. In 2023, the standard mileage rate is 65.5 cents per mile. In 2021, the standard mileage rate is 58.5 cents per mile from January 1 through June 30 and 62.5 cents per mile from July 1 through December 31. To determine the number of miles driven for business, you’ll need two numbers for your business vehicle (or vehicles): the total number of miles driven during the year and total number of miles driven just for business. You’ll need to log your business miles to make sure you only deduct for those miles driven and not for personal use. This will also need to be mileage driven above and beyond your normal commute between your home and workplace.
Actual expenses. The IRS allows you to tally all of your auto-related business expenses and use this method for calculating the allowable deduction on your car as an alternative to the standard mileage rate. Deductible expenses include costs like gas and oil, maintenance and repairs, tires, registration fees and taxes (also deductible under the standard mileage deduction), licenses, rental or lease payments, insurance and more. Again, you’ll need to keep track of how much you used your vehicle for business versus personal use. Based on the percentage used for business, you can deduct the applicable amounts of your actual vehicle expenses if it saves you more money on your taxes than the standard mileage rate.

Owning equipment is often an essential part of a functioning small business. As these assets age and experience normal wear and tear, their value depreciates. The IRS allows you to offset a portion of your income equivalent to the asset’s reduction in value over its useful life.

However, depending on the assets you buy, you might have a few different means for claiming a deduction for depreciation:

Section 179 deduction. Section 179 expensing simplifies your bookkeeping, giving you a large deduction in the first year the asset is placed in service. In 2023 the deduction limit is $1,160,000 and in 2022, you can deduct up to $1,080,000 from your business income.
Bonus depreciation. This differs from Section 179’s fixed maximum deduction amount by allowing you to deduct a large percentage of the purchase price of eligible assets. The Tax Cuts and Jobs Act of 2017 doubled the bonus depreciation deduction from 50% to 80% in 2023, meaning you can often deduct a larger portion of the cost of new or used equipment you’ve purchased and placed into service.
MACRS depreciation. The Modified Accelerated Cost Recovery System allows businesses to take larger tax deductions in the early years of an asset’s life and smaller deductions in later years. This allows businesses to reduce their taxable income today, but increasing it later as compared to using straight-line depreciation. This gives you a lower net present value of your tax burden, saving you money.

Investing in your company allows you to deduct these expenses all at once, or over several years. In either situation, the depreciation deduction lowers your taxable income, reducing your tax bill.

For vehicles used for your business, you may be able to claim a deduction for depreciation from your income. But before you splurge on a fancy vehicle to write off on your taxes, you should be mindful of rules the IRS has in place regarding luxury autos.

For new and pre-owned vehicles put into use in 2022 (assuming the vehicle was used 100% for business), the maximum first-year depreciation write-off is $11,200, plus up to an additional $8,000 in bonus depreciation. For 2023, these amounts are $12,200 plus up to an additional $8,000 in bonus depreciation.

If you’ve purchased an SUV with a loaded vehicle weight over 6,000 pounds, but no more than 14,000 pounds, typically 80% of the vehicle’s cost can be expensed in the year of acquisition using bonus depreciation in 2023, which is treated as an actual expense for calculating your net income.

TurboTax Tip: Congress extended certain bonus depreciation rules until January 1, 2023. Unless it is further extended, the first-year bonus depreciation goes down by 20% each year until disappearing on January 1, 2027.

The home office deduction is a valuable tool small business owners can use to reduce their tax bill each year. Claiming it requires you to meet two criteria:

Exclusive and regular use: You must use a portion of your house, apartment, condominium, mobile home, boat or similar structure exclusively for your business on a regular basis. This also includes structures on your property, such as an unattached studio, barn, greenhouse or garage. It doesn't include any part of a taxpayer's property used exclusively as a hotel, motel, inn, or similar business.
Principal place of business: Your home office must be either the principal location of your business or a place where you regularly meet with customers or clients. Some exceptions to this rule include daycare and storage facilities.

Exclusive use means only business activity is conducted inside the office. This doesn’t mean you need to rush out if you get a personal call unrelated to business or no family member can go into your office. Instead, the IRS looks for you to meet the spirit of the exclusive use test as long as personal activities invade the home office no more than they would be permitted to happen inside an office building.

The office needs to be clearly defined from other personal-use areas of your home to qualify. Further, you need to regularly use the home office as your principal place of business.

The IRS allows you to deduct most of the financing costs you pay for your business, such as fees and interest on loans, credit cards and other forms of credit. However, you’ll need to meet certain requirements on some finance charges you pay on loans you take for capital assets used in your business. Further, you might not be able to deduct interest on any loans that charge non-deductible interest. That said, unless the interest you pay is subject to special limitations, it typically counts as a deductible business expense on your taxes.

Some examples of deductible financing costs you might need to take on for your business are mortgage interest on an office building, financing charges built into a lease contract or fees associated with invoices that have extended payment terms.

In small business, every penny counts. If you can lower your tax liability, it may result in extra profit you get to keep—or reinvest in your business. Fortunately, the IRS has provided several opportunities to lower your tax bill as a small business owner.

Some of these require tax planning in advance, such as choosing the right vehicle for your business, suitable retirement account contributions, and more. To make the most of the deductions available to you, consider working with a tax professional who can identify your unique needs.

With TurboTax Live Business , get unlimited expert help while you do your taxes, or let a tax expert file completely for you, start to finish. Get direct access to small business tax experts who are up to date with the latest federal, state and local taxes. Small business owners get access to unlimited, year-round advice and answers at no extra cost, maximize credits and deductions, and a 100% Accurate, Expert Approved guarantee.

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The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.

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8 Tax Filing Strategies for Small Business Owners

Claim the Health Care Tax Credit

Deduct certain property, deduct charitable contributions, the work opportunity tax credit, claim a credit if your business provides child care expenses, claim the pension plans startup cost credit, deduct health care premiums, miscellaneous deductions, frequently asked questions.

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If you’re a business owner, then tax season can bring on a whole new set of tax-related challenges. Fortunately, there are a number of valuable tax filing strategies to maximize credits and deductions that can benefit a business owner.

Determining what federal tax forms you need to file will depend on the form of your business. Each form of business —sole proprietorship, partnership, corporation, S corporation, and limited liability company (LLC)—has specific sets of filing rules. When it comes to state taxes, your requirements will also depend on the legal structure of your business.

Many small business owners find comfort in working with a CPA or qualified tax professional . If you feel comfortable enough to prepare your taxes on your own, there are several great filing strategies to maximize credits and deductions that you'll want to be aware of.

You can take a deduction for providing certain types of child care or health care for your employees.
You may be able to take a deduction for certain employee salaries.
You can take a deduction for many necessary business expenses, including travel and purchasing business property.

You’ll want to speak to your CPA to make sure you’re eligible, but the health care tax credit can produce some savings. This credit benefits employers with fewer than 25 full-time employees that pay an average salary of less than $56,000 per year and pay at least half of employee health insurance premiums.

If you cover at least 50% of your employees' health insurance premiums and meet other qualifications, the Small Business Health Care Tax Credit could provide a tax credit of up to 50% of your related costs. See the government's guide to Small Business Health Options Program (SHOP) and other resources for details.

You can deduct business property from your taxes by taking the 179 deduction and filing Form 4562. You can deduct up to $1,080,000 of eligible business property for tax year 2022.

You can only deduct the full amount in the year your business began using the property, so it works well for those who have recently moved, or for business owners who acquired new property used for transportation, manufacturing, business, or research.

While tax deductions and tax credits both reduce how much tax you owe, tax credits are the more valuable of the two. That's because they reduce the amount of tax you owe, dollar-for-dollar, after your tax liability has been calculated. Deductions, on the other hand, reduce the amount of income used to determine what you owe, and their effect is less pronounced than a credit (generally by the same percentage of the tax bracket you land in).

Sole proprietors, partnerships, LLCs, and S-corporations can't deduct charitable contributions as a business expense, but a business owner or shareholder can claim any contributions made by the business as an itemized deduction on Schedule A of Form 1040.

Even taxpayers who do not itemize can claim a deduction for cash donations to qualified charitable organizations. You can claim a deduction of up to $300 per taxpayer for charitable contributions made by cash or check during the tax year.

The Work Opportunity Tax Credit is available for businesses who hire qualified members of certain groups, including veterans, SNAP and SSI recipients, and ex-felons. The credit amount can vary, but in general, you can receive a credit of up to 40% of the first $6,000 of qualified wages paid to a new hire from one of the specified groups. The employee would need to work at least 400 hours for your business in order for you to qualify for the credit.

If your business pays for your employees’ child care expenses, you can receive a tax credit. The credit is 25% of qualified child-care expenses paid and 10% of qualified child care resource and referral expenditures. For providing these services, your business can deduct no more than $150,000 from taxes.

If you’ve just started a retirement or pension plan for your employees, including a SEP, SIMPLE IRA, or 401(k) plan, you may be eligible for a credit. It’s worth up to $5,000 for the first three years of the plan to help small businesses recoup the costs of starting a plan.

This applies for freelancers and self-employed individuals, not just any small business. If you have an individual health plan and pay premiums out-of-pocket, you can reduce your taxable income by the amount you paid in premiums. If you itemize your deductions, you can also deduct any medical expenses that are more than 7.5% of your adjusted gross income.

Out-of-town business travel, ATM card fees for your business, and even newspapers bought to conduct your business can be used as deductions . You'll want to look through all of your business expenses and possibly check with a tax professional to make sure you're taking full advantage of any tax deductions.

How do small business owners reduce taxes?

There are many ways that small business owners can reduce taxes. They may be able to take deductions if they pay for certain types of health insurance, depreciate business property, hire certain qualified employees, and make sure to always record and then deduct the costs of other business expenses like travel.

How much does a small business owner have to make to file taxes?

If you're self-employed and made $400 or more, you have to file an income tax return, even if you won't actually have to pay any taxes that year.

Healthcare.gov. " The Small Business Health Care Tax Credit ."

Internal Revenue Service. " Instructions for Form 4562 (2022 Draft) ."

Internal Revenue Service. " New Rules and Limitations for Depreciation and Expensing Under the Tax Cuts and Jobs Act ."

Internal Revenue Service. " Publication 535: Business Expenses (2021) ," Page 47.

Internal Revenue Service. " Publication 526: Charitable Contributions ," See 'Cash contributions for individuals who do not itemize deductions'.

Internal Revenue Service. " Work Opportunity Tax Credit ."

Bipartisan Policy Center. " What is the Employer-Provided Child Care Credit (45F) ."

Internal Revenue Service. " Form 8882: Credit for Employer-Provided Childcare Facilities and Services ."

Internal Revenue Service. " Retirement Plans Startup Costs Tax Credit ."

Internal Revenue Service. " Topic No. 502 Medical and Dental Expenses ."

4 Types of Business Structures — and Their Tax Implications

When starting, a new business must select a business structure, which will have both legal and tax implications. And, the choice of business structure is a monumental step for a new company. It can affect ongoing costs, liability and how your business team can be configured. This topic becomes particularly timely during tax season, as your business’ structure has direct tax implications.

Have no fear: Below, we outline the most common types of business structures and their respective tax ramifications.

What Is a Business Structure?

A business structure is a type of legal organization of a business. When starting a new business, it’s important to take time to decide on the right type of business entity. The business structure you choose doesn’t have a lot of impact on the day-to-day operation of your business, but it is extremely important in defining ownership, limiting personal liability, managing business taxes, and preparing for future growth.

At a basic level, business entities establish the business as a legal entity that can have bank accounts, enter into contracts, and conduct business without putting everything in your own name. For some very small businesses, working under your own name may be okay, but if you plan to earn a full-time income from the business, sign contracts, or hire employees, it’s likely in your best interest to choose a business structure and register with your state.

Key Takeaways

A business structure is a form of legal organization for a business.
The right business structure may offer personal liability protection and other benefits.
Most businesses should choose a business structure and register with their state.
There are unique pros and cons of each type of business structures for every business.

Business Structures Explained

If you’ve ever had a job, rented a home, or bought a car, you likely signed a contract where you were acting as yourself. However, on the other side of the contract, the signature lines may show someone signing on behalf of a business. For that business to enter into a contract, it must use a recognized business structure and maintain an active registration with the state government.

When you sign a contract or do business as yourself, which is the default if you start a business and don’t register, you are personally liable for anything that goes wrong. If you make a mistake with a client or someone is injured by your product or service, you could be personally liable for any financial damages. That means they can sue you and go after your personal bank accounts, investments, home, and other assets in the suit. When you operate a registered business and follow best practices, your personal assets are protected.

By default, your business is considered a sole proprietorship, where you are the business and transact under your own name. When you create an LLC, corporation, or partnership, that new entity takes your place on contracts. Once you reach a certain income level, if you’re running the business full-time, there are additional tax benefits as well.

However, business entities are not free. Every state requires different fees to start and maintain a business. You may be able to file the registration paperwork on your own, but many people choose to hire a lawyer to ensure the business is created correctly and stays in compliance with local, state, and federal laws. Because every business and business owner is unique, it may be worthwhile to consult with a legal or tax professional for advice on choosing the best business structure for your long-term goals.

What Are the Four Types of Business Structures?

1. sole proprietorship.

A sole proprietorship is the most common type of business structure. As defined by the IRS (opens in new tab) , a sole proprietor “is someone who owns an unincorporated business by himself or herself.” The key advantage in a sole proprietorship lies in its simplicity. Here, there is no distinction between the business and the individual who owns it — which means that the owner is entitled to all profits. However, it also means that the sole proprietor is responsible for all the business’s debts, losses and liabilities. This means that creditors or lawsuit claimants may have access to the business owner’s personal accounts and assets if the business accounts cannot cover the debt. Examples of sole proprietorship include freelance writers, independent consultants, tutors and caterers.

Overview of liabilities

Liabilities are defined as a company’s financial debts or obligations that arise during business operations.

Limited liability is a type of legal structure where a corporate loss will not exceed the amount invested in a partnership or LLC. In other words, investors’ and owners’ private assets are not at risk if the company fails. So, if a company with limited liability is sued, then the claimants are suing the company; personal assets can’t be touched.

Whereas personal liability is when a business owner’s assets can be used to satisfy any business debts.

However, "piercing the corporate veil" is the most common in close corporations to settle debts and can occur when serious misconduct takes place. This is when courts put aside limited liability and hold a company’s shareholders personally liable for the corporation’s actions or debts.

Pass-through entity

In terms of tax implications, sole proprietorships are considered a “pass-through entity.” Also known as a “flow-through entity” or “fiscally transparent entity,” this means that the business itself pays no taxes. Instead, taxes are “passed through” to the owner. Pass-through entities are not subject to corporate income tax. Profits pass through to owners who pay them in their personal returns under ordinary income tax rates on the typical Tax Day, usually April 15.

No cost to start — You are a sole proprietor by default.
Easy to maintain — There are no ongoing registration or legal requirements to start, maintain, or shut down a sole proprietorship.
Personal liability: You are personally liable for anything that goes wrong related to the business.
No tax benefits: You must pay self-employment tax on all earnings and include business earnings on your personal tax return using Schedule C.
Less professional: Clients and customers may find you to be unprofessional unless you operate a legally registered business. You may also struggle to get business financing.

2. Partnership

In business structure, a partnership is (opens in new tab) “the relationship existing between two or more persons who join to carry on a trade or business.” Partnerships have three common types of classifications: a general partnership (opens in new tab) , limited partnership (opens in new tab) or a limited liability partnership (opens in new tab) .

General partnership: Consists of two or more partners who share all liability and responsibility equally. This means the partners both take part in the day-to-day operations of the business. It also means that the partners are equally liable for any debts generated by the business. All partners are considered “general partners.”
Limited partnership (LP): Has at least one “general partner” and one “limited partner.” A general partner assumes ownership of the business operations and unlimited liability. A limited partner, also known as a silent partner, invests capital in the business. However, limited partners are not involved in the day-to-day operations and don’t have voting rights (opens in new tab) and therefore have limited liability.
Limited liability partnership (LLP): In this arrangement, all partners have limited personal liability, which means they are not liable for wrongdoings (i.e. acts of malpractice or negligence) committed by other partners. All partners in an LLP can be involved in the management of the business. It tends to be more flexible than the previous partnership forms because partners can determine their own management structure.

Like a sole proprietorship, partnerships are considered a pass-through entity when it comes to taxation. In many ways, a partnership is like an expanded sole proprietorship — but with the advantages and disadvantages that comes with a partner. A partner can provide expertise, skills and capital for the business. But while they can affect the business positively, they can also impact it negatively. You should be comfortable with whomever you enter into business with.

Partnership tax returns are due the fifteenth day of the third month after the end of the entity’s tax year, which is typically March 15 (or March 16 in 2020). However, while the taxes are filed in March, partners don’t tend to pay taxes on the business until the April deadline (July 15 in 2020) since it passes through to their personal tax return.

Relatively easy to create: Creating a partnership with your state is a relatively simple process.
May offer liability protections: Limited Partnerships and Limited Liability Partnerships may offer personal financial and legal liability protection.
May not protect from all liabilities: Partnerships may not shield all personal liability depending on the specific business structure and operations.
More complex tax requirements: Partnerships must file their own tax returns and supply additional forms to partners for personal taxes.

3. Limited liability company

Now, a limited liability company (LLC) is where things start to get a little dicey. The IRS states that an LLC is a “business structure allowed by state statute.” That means it is formed under state law and the regulations surrounding LLCs vary from state to state. Depending on elections made by the LLC and its characteristics, the IRS will treat an LLC as either a corporation, partnership or as part of the LLC’s owner’s tax return (i.e. a “ disregarded entity (opens in new tab) ” with many of the characteristics of a sole proprietorship).

An LLC is considered a hybrid legal entity because it has traits of numerous other business structures, depending on the elections made by the owners. This lends it more protections and flexibility than some of its business structure counterparts. From a protections perspective, members of an LLC are not personally liable. Because the LLC is an entity created by state statute, it has flexibility in regards to federal tax treatment. For instance, a single-member LLC (opens in new tab) can be taxed as a sole proprietorship or a corporation. A multi-member LLC (opens in new tab) can be taxed as a partnership or a corporation.

The aforementioned flexibility causes some discrepancies when it comes to the federal tax due date.

An LLC that chooses to be viewed federally as a sole proprietorship or C corporation (find more on C corporations types below) will typically have a federal tax filing and payment due date of April 15.
However, an LLC being taxed as an S corporation or partnership will typically have a federal tax filing due date of March 15 and a payment deadline in line with their individual income return.
Liability protection for one or more owners: When established and operated correctly, an LLC offers liability protection for owners, including a single owner.
Choose between two taxation methods: Choose between pass-through taxation or S Corp taxation depending on which is more beneficial to owner finances.
Potential for major tax savings: Owners who work in the business full-time may save on self-employment taxes with S Corp taxation.
Costs to establish and maintain: LLCs require government forms and fees to establish and maintain.
More complex tax requirements: Tax preparation may be more complex, particularly if you opt for S Corp taxation.

4. Corporation

Corporations are a company or group of people authorized to act as a single legal entity. This means that the company is considered separate and distinct from its owners (i.e. there’s no personal liability here). However, a corporation is eligible for many of the rights that individuals possess, hence why it is sometimes referred to as a “legal person.” (opens in new tab) For instance, a corporation can sue or be sued, enter into contracts and is entitled to free speech.

The IRS splits corporations into two separate classifications: the “C corporation” and the “S corporation.”

C corporation (C corp): A C corporation is considered the default designation for corporations. All corporations start in the “C” classification when filing articles of incorporation with the state’s business filing agency. Unlike our preceding business structures, C corporations are not a pass-through entity. They are taxed twice at a corporate and personal income level, which is referred to as double taxation.
S corporation (S corp): An S corporation is distinctively different from a C corporation because it is a pass-through entity, allowing it to avoid double taxation. However, the IRS institutes strict standards (opens in new tab) for companies looking to qualify for S corporation status, particularly around shareholders. For instance, an S corporation can only have 100 shareholders, and they must be U.S. citizens/residents. (It’s not unusual for startups to issue 100,000 shares of stock (opens in new tab) at their outset.)

Like partnerships, an S corporation must always file its annual federal tax return by the fifteenth day of the third month following the end of the tax year, generally March 15. The income is then passed down to its members individual returns, which adhere to the normal April Tax Day.

Corporations are the only business tax structure allowing for perpetual existence. This means that its continuance is not affected by the coming and going of shareholders, officers and directors.

Extensive liability protections: S Corp and C Corp owners are shareholders and receive more extensive legal protection if the business operates correctly.
Corporation acts as a legal person: The corporation can enter contracts and transact as its own legal entity.
Can have unlimited shareholders: S Corporations may have up to 100 shareholders. C Corporations can have unlimited shareholders.
More costly to establish and maintain: Corporations typically require more work and higher fees to establish and maintain.
Detailed ongoing requirements: Corporations have requirements such as annual meetings, appointing a board of directors, and other state-imposed regulations.

What Are the Tax Pros and Cons of Each Business Structure?

Choosing a business structure.

The best business structure for your company depends on your long-term goals, ownership, plans to hire employees, and legal risk. While some very small businesses and side hustles may operate safely as a sole proprietorship, most businesses are better off registering a business with their state.

The best business structure for businesses that don’t plan to bring in outside investments is often an LLC, as it works for one or more owners with lower startup and maintenance requirements than a full corporation. If your business employs one or more owner full-time, it could make sense to register as an LLC and opt for taxation as an S Corporation.

If you plan to bring in outside investment rounds and may grow into a publicly traded company in the future, the best business structure is a C Corporation, as that structure allows for 100 or more shareholders.

Because of the important tax and legal implications, it’s often well worth the cost to consult with an attorney or tax expert for advice on the best business structure for your needs and goals.

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Choosing a legal business structure is a critical step in your business's lifecycle. It affects everything from the ability to attract investors to personal liability and government paperwork.

Businesses owners should weigh their own personal circumstances and long-term business goals against the costs to pick the best possible legal structures. Once you have that important decision locked in, it's back to focusing on what's most important: running your day-to-day operation for maximum business profits.

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Selecting a tax professional as a small business taxpayer

What a small business can expect from a tax professional

Tax professionals are often able to advise a small business on the most effective way to structure their business. For instance, they can help a business owner decide whether their business interests would be better protected as a sole proprietorship or if another business structure , such as a partnership or S corporation, would serve them better.

Many tax professionals inspect books and records to help a business make sure that it is reporting all income. They can also make sure the business claims all the deductions and credits available to it.

A tax professional can help small business taxpayers answer other questions as well, such as whether they are subject to excise taxes or need to file employment tax returns.

A qualified tax professional may be able to represent the business if it’s contacted by the IRS regarding a tax matter.

A knowledgeable practitioner is also aware of many tax-related scams , like phishing, unclaimed refunds, ghost preparers and others described on the Tax scams/Consumer alerts page of IRS.gov. A practitioner knows that if something sounds too good to be true, it probably is, and they can help businesses avoid and report such scams.

Find a small business tax professional

Taxpayers are responsible for all the information on their income tax return no matter who prepares the return, so it’s important to find a reputable preparer. The IRS offers these tips to small businesses looking for a tax professional:

Check the IRS Directory of Preparers . It lists preparers who hold professional credentials recognized by the IRS or a Record of Completion in the IRS’s Annual Filing Season Program .
Check the preparer’s history with the Better Business Bureau or verify the enrolled agent’s status on IRS.gov.
Ask about the practitioner’s fees up front.
Find out if the preparer is an authorized e-file provider .
Ensure the preparer is available throughout the year to help address any questions about the preparation of the tax return.
Always review the business tax return before signing it.
Ensure the preparer signs the tax return and includes their 9-digit Preparer Tax Identification Number. All paid preparers must have a PTIN to prepare tax returns.

IRS resources for small businesses

The IRS offers many programs to help small businesses, including the Information Return Intake System , the IRS Business tax account , and other IRS resources listed at Tax information for businesses on IRS.gov.

More information

Topic no. 254, How to choose a tax return preparer

Subscribe to IRS Tax Tips

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Seize the opportunity: Transferring business interest to save estate taxes

When planning for the future transition of your business you have many options to consider, including taking advantage of estate planning strategies designed to transfer ownership interests to your family in a tax efficient manner. But this valuable planning opportunity is too often lost by owners not acting well in advance of a business sale, or before their death if the business is staying in the family.

Why is estate tax planning so important for business owners

Depending upon your net worth you may have a silent partner in your business—the IRS for a 40% percent interest and at no risk! That’s because the current federal estate tax rate is 40% with the estate tax payment due nine months after a business owner’s death (or for married couples upon the last to die of the business owner and their spouse). And for business owners who live in a state that has its own estate tax, that rate can jump up significantly. For example, the Illinois estate tax rate can be as high as 16%.

This estate tax account payable can be a huge contingent liability that if not strategically planned for can negatively impact the future viability of your business. And if you plan on selling your business, not moving ownership interests to the next generation well inadvance of a sale will allow the IRS to share in a portion of the sales proceeds if those dollars are eventually taxed in your estate.

Taking advantage of the exemption amount

The federal estate and gift tax exemption amount has never been higher ($13.61 million per person or $27.22 million for a married couple). But absent future action by Congress, the current exemption amount is scheduled to be cut in half after 2025. So there is a potential use it or lose it opportunity right now to make use of the “extra” exemption before it possibly goes away.

Unfortunately, you cannot choose to apply the exemption amount from the “top” first. Essentially what this means is that to get the benefit of the extra exemption you must make gifts that in total exceed what the exemption amount will revert back to in 2026. For example, if the estate tax exemption ends up being $7 million in 2026 you would need to make gifts in excess of that amount prior to the end of 2025 to receive any benefit from the current extra exemption.

For business owners who have a substantial estate tax exposure making large gifts to use up the full amount of their extra exemption can easily result in millions of dollars in future estate tax savings. But even business owners looking at a more moderate estate tax liability should consider the benefit of using at least some of their exemption for lifetime gifting to shift future appreciation out of their taxable estate.

With the constantly changing political climate and ever-increasing federal budget deficits it’s also always possible that the exemption amount could be further reduced in the future. So for many business owners, gifting early and often will be the right strategy to save on estate taxes.

Leverage valuation discounts

A compelling reason to make lifetime transfers of interests in your business is to take advantage of valuation discounts that will otherwise not apply if you sell your business or wait until death to transfer ownership to your family. Minority interest and lack of marketability discounts can substantially reduce the gift tax value for such transfers getting you more bang for your buck from your exemption amount. Transferring nonvoting interests may enhance the discount while also allowing you to retain complete management control of your business until you have put a leadership succession plan in place.

To take advantage of valuation discounts, it is important that any transfers of ownership interests occur well before a subsequent saleof the business to minimize the risk of an IRS challenge that the transfers were made in contemplation of sale. The valuation provisions in the shareholder agreement for the business should also be reviewed to ensure they are consistent with the application of a discount on the transferred ownership interests. For gift tax reporting purposes, a business valuation will be required along with a qualified appraisal of the ownership interests being transferred.

The benefits of a trust for transfers of business interests

Many business owners utilize trusts for transfers of ownership interests to allow for multi-generational sheltering from the estate tax. Holding a transferred business interest in trust can also provide family members with a measure of creditor and divorce protection. If professional oversight of trust distributions and management of liquid investments (including any future business sales proceeds) is desired, then naming a corporate trustee for such duties can provide that additional layer of protection for your family while still allowing you to designate one or more individuals to serve as the trustee(s) responsible for making all decisions concerning the business interests held by the trust.

If you are married, a Spousal Lifetime Access Trust (SLAT) is a special type of trust you may want to consider for transfers of business interests, because your spouse can be included as a beneficiary along with your other family members without causing estate tax inclusion. Trust distributions can be made from the SLAT to your spouse if needed to help maintain your accustomed manner of living and if properly structured your spouse can even act as the trustee to oversee trust distributions and investments.Setting up a SLAT for your spouse may be an attractive strategy to make a large gift and take full advantage of your estate tax exemption amount. Depending on your situation and with proper planning to avoid the trusts being considered reciprocal, you and your spouse could also consider establishing SLATs for the benefit of each other.

The advantages of an IDGT

A way to “supercharge” your planning is to structure your trust as an intentionally defective grantor trust (IDGT). An IDGT is designed so that the contributions you make to it are completed gifts removing all future appreciation on the trust assets from your taxable estate. At the same time, the trust includes special provisions allowing for it to be disregarded (i.e., “defective”) for income tax purposes and treated as a ”grantor trust” whose income remains taxable to you. Transactions between you and the IDGT, including your sale of appreciated business interests to the trust, are treated as nontaxable events for income tax purposes so no capital gains are realized.

Why would you want to continue to be responsible for paying ongoing income taxes on the business interest you have transferred to the IDGT? Well, your payment of the income taxes for the trust essentially amounts to a tax-free gift to the trust beneficiaries allowing a greater amount of wealth to be transferred to the next generation and out of your taxable estate.To provide flexibility the IDGT can be structured so that the grantor trust status can be turned off with the trust becoming responsible for paying its own income taxes.

Selling business interests to an IDGT for an estate freeze

From a pure estate tax reduction standpoint, the easiest and most tax effective transfer method generally would be for you to simply make gifts of interests in your business to your desired beneficiaries either outright or ideally to an IDGT. But if you have concerns about ensuring your own financial security or giving away too much, you may be more comfortable selling the business interest to an IDGT in return for an installment note. Conversely, a sale to an IDGT may be the right strategy if you want to make a transfer that exceeds your gift tax exemption amount.

This estate freeze strategy transfers all of the future appreciation on the transferred business interest out of your estate while paying you back over time the discounted value of such interest plus a modest interest component. A SLAT is considered an IDGT for income tax purposes so it can be an ideal vehicle for this strategy.

The installment sale to an IDGT strategy is designed for businesses that are structured as pass-thru entities for income tax purposes, like S corporations and LLCs. Because you will still be treated as the owner of the transferred business interest for income tax purposes, the IDGT can use tax distributions to make note payments to you. Any shortfall will need to be paid with additional distributions from the business or, if the business is eventually sold, from the IDGT’s share of the sales proceeds. Consequently, a very important condition of implementing this strategy is that a financial analysis be done first to confirm that sufficient cash flow will be generated by the business to support the IDGT’s debt service obligations.

Here’s a look at how the transaction would work in an illustrative case:

You would first make a gift to the IDGT equal to at least 10% of the value of the business interest being sold. This is referred to as a “seed gift” which is used to support that the later transaction is a bona fide business deal and that the IDGT is a creditworthy borrower with other available resources.
The IDGT will then purchase the business interest from you with an installment note equal to the fair market value of the business interest being sold (taking into consideration applicable discounts).
You can set the payment terms of the note to amortize or be interest only with a balloon payment. Interest is typically set at the IRS Applicable Federal Rate and will not be taxable to you.
The IDGT will use tax distributions from the business to make payments to you on the installment note. If the business is sold, the IDGT can use its share of the sales proceeds to pay off the note.
Your sale of the business interest to the IDGT will not be a taxable event and no capital gains tax will be due. The transaction will be treated as a sale and not a gift because the IDGT has purchased the interest for fair market value.

After the note is paid off or if distributions from the business to the IDGT exceed what is needed for servicing the debt, such excess cash flow can be invested or perhaps used to acquire life insurance on your life to provide your family with tax-free proceeds for additional liquidity upon your death.

Have a coordinated plan

The strategic planning for your business and your estate planning should go hand-in-hand. BMO Wealth Management Business Owner Strategists can help you develop an integrated game plan that considers your family dynamics, ownership goals and leadership succession objectives in aligning the strategy for your business with your estate plan.

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