8 Areas Every Business Owner Should Look at for Tax Savings/Revenue Protection
When it comes to tax planning, tax efficiency is paramount. You can think of this area as a revenue protection one as well. Reduction of tax liability is critical for you as a business owner to keep more of your revenue. By learning how to do this and use more advanced strategies you might be able to shift your revenue correctly, and help keep more of your hard earned profits as opposed to constantly think of another expense you can spend it on to have a tax deduction.
Tax efficiency is simply an attempt to minimize your tax liability and increase your net revenue (profitability) when given different financial decisions. To be tax-efficient, the tax outcome must be lower than an alternative financial structure that achieves the same end. From years of planning and thousands of cases, we’ve learned that in some scenarios tax-efficiency can outperform your basic rate of return formulas. The issue is that most business owners are not aware of the more advanced concepts beyond just regular deductions, business expenses, and asset depreciation.
Majority of revenue protection/tax strategies fall within these key considerations every successful business should know and go over with his/her advisory team:
Tax Deferral - conserving cash and delaying recognition of taxable income into future years/lower tax rate environments should be considered in all business tax decisions. Maximizing the ability to contribute to retirement plans is an important consideration for business owner’s success. One of the issues we see quite often is that business owners are not aware of the ways to put away a lot more into their retirement plans than just regular contributions into a 401k plan. Retirement plans can be layered onto one another. Define Contribution plans can be done in conjunction with Defined Benefit plans, and when structured correctly could allow the owner(s) of the business to put away significantly more dollars in addition to what they are already doing.
Entity Formation - the type of legal and tax entity structure may be as important as the industry you are in and type of business that you operate. Having enough revenue to allow for the formation of multiple entities that do business with each other is a key component of revenue shifting strategies. In addition, incorporating your business correctly could have an immense impact on the tax liability you’d be exposed to if and when you sell your business. Doing it correctly might mean significant tax savings.
Tax Rate Arbitrage - there are planning opportunities to redirect income recognition from higher to lower tax rate environments without transferring operational control of a business. These strategies are especially impactful if the business owner has no plans to sell the business in the foreseeable future (five or more years). Properly structured it can potentially allow you to shift a portion of your revenue from the highest tax bracket you are currently in to a lower one a few years down the road when you decide to distribute the revenue for whatever purpose you desire.
Intellectual Property - how you own and where you own your intellectual property are essential considerations for tax efficiency. The right entity formation and the structure of ownership could qualify you for not only additional tax deductions, but could allow for income/revenue shifting as well.
Wealth Transfer - making good decisions on how and when to transfer income/wealth producing property may pay off in reducing estate taxes. Knowing how to transfer wealth/stock from your business while you are still running it can mean a world of difference to not only the control of it throughout multiple generations, but also a significant impact from the estate tax perspective, as well as the capital gains tax perspective if you were to ever sell the business. Doing it correctly within your estate plan with the appropriate trusts, and in the right states that offer significant asset protection, is a key to strive for a successful wealth and tax strategy transfer.
Business Succession Planning - having an overall plan that addresses both the operational and income/estate tax issues is key to ensuring continuity of a closely held business while minimizing the financial tax disruption. Structuring the funding of the succession planning agreements in the appropriate ownership structure can have a significant impact on the cost basis of the shares as well as the future taxation of the shares of the business if something were to happen to one of the owners.
Maximization of Tax Deductions - One of the easiest ways to reduce your income tax liability is to claim all the tax deductions legally available to your business. Because the tax laws are ever-changing it is important that you have a qualified professional on your team to help mitigate any tax arbitrage and help you come up on top. We find that majority business owners are taking the standard deductions and depreciations. However when it comes to accelerating the non-cash expenses in the form of accelerated depreciation and the timing of this acceleration, majority of the business owners and their advisors fall short and never look at it as a viable solution.
Maximization of Tax Credits - with constantly changing political environment and tax laws, there is always an opportunity to look into which tax credits a specific business could qualify for. We find that this is one of the easiest and most often missed opportunities for a business to possibly lower their taxes. All it takes is the understanding of what the current tax credits are and being proactive about taking advantage of them. Whether it’s a R&D credits, employment based credits, industry specific credits, etc…..there are numerous opportunities to possibly qualify for one or more of these.
For more detailed information, or to simply see which of these might apply to your situation, simply schedule a 45-minute discovery call.
Ascent Wealth Strategies provides strategies for financial/estate and/or tax planning. These strategies do not constitute tax or legal advise. Consult legal or tax professionals for specific information regarding your individual situation.
Clear Creek Financial Management, LLC dba Ascent Wealth Strategies is a Registered Investment Advisor. This case study is solely for informational purposes. Advisory services are only offered to clients or prospective clients where Clear Creek Financial Management, LLC 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 Clear Creek Financial Management, LLC unless a service agreement is in place.