Tax Strategies for Business Owners
Would You Spend 10 Minutes a Month to Save on Taxes?
Can you spend 10 minutes a month to potentially save thousands in tax dollars? In this new blog series, we will share tips on how to reduce your taxes with company retirement plans. That’s worth 10 minutes, right? I will tell you the types of plans we will focus on, who would be a good fit for that plan, and when it is best to set them up or make modifications.
As a business owner, you’re busy focusing on managing your business, your specialty, and customer satisfaction. You have a lot on your plate. Sometimes, this busyness affects the time you have available to educate yourself on financial matters as well as impacts your time for financial planning. Let us help you drill down and focus on a few key areas.
As a wealth management practice, part of our job is education. To achieve this goal, we are focusing on a blog series for business owners. Each blog will be about a 10-minute read, and we hope that you will gain some helpful takeaways during this short time.
One of the largest outflows for a business owner is taxes. Over the next few months, we hope to provide you with valuable information on tax strategies you can implement using retirement plans to benefit you and your family’s situation. We will do a deep dive into each type of plan with a detailed description of the pros and cons of that plan and how you can use it to potentially reduce your tax burden. To lay the groundwork for upcoming blogs, we’ll start with an overview of each plan in this blog, for whom it may be most suitable, what issues the plan may help solve, and some timing issues where appropriate.
Cash Balance Plans
The first retirement plan we will discuss is a Cash Balance Plan. A Cash Balance Plan is a type of defined benefit plan that is similar to a traditional pension plan, has significant tax benefits, and is approved by the IRS.
If you are a small business owner that has a higher income, needs deductions, or has built a successful business later in life, a cash balance plan could be the perfect plan for you.
Establishing a cash balance plan can provide you with much higher contribution limits than a 401(k) alone. Not only is this a huge benefit for those trying to catch up on retirement contributions, but the contributions are also tax deductible, providing potentially substantial tax savings. Cash balance plans have strict setup and funding dates that must be handled by the tax filing deadline of the business. If you think this sort of plan is for you, now is the time to discuss it with your tax professionals.
Another plan we will discuss in depth in the coming months is profit-sharing plans. Simply put, a profit-sharing plan allows you as an employee of your own corporation and your other employees to share in the profits of your business. And you get potentially large tax benefits for your employer contributions. As a defined contribution pension plan, it offers great flexibility, is available for companies of any size, and may be added to your other retirement plans.
Like cash balance plans, profit-sharing plans are good options for business owners that would like to increase the amount of tax deductions they have and save more money for retirement. It can also be an excellent option for closely held family businesses where the employees are made up of mostly family members.
As with cash balance plans, there are specific setup and funding dates that must be followed. All employer contributions must be made by the tax filing deadline to receive deductibility for this tax year.
SEP and Simple IRAS
Simplified Employee Pension plans and Simple IRAs are other ways to benefit you and your employees while at the same time reducing taxes. Both plans are available for businesses of any size, including self-employed.
Due to their simplicity, neither the SEP nor SIMPLE IRA require any additional IRS reporting and are relatively easy to establish and maintain. While not allowing the very large contributions of some of the other plans, the SEP and SIMPLE IRAs are perfect for business owners that want to add a bit more to their retirement accounts than a standard IRA allows and get the tax savings but don’t want to pay the setup and operating costs required by the more complex plans.
Executive Bonus Plans & Non-Qualified Deferred Compensation Plans
In our final blog in this series, we will discuss both Executive Bonus Plans and Non-Qualified Deferred Compensation Plans. Both types of plans work in very different ways and have different advantages, but both are great tools for those business owners that want to reward or incentivize key employees without having to worry about the strict non-discrimination rules that come with qualified plans and still want to receive potentially significant tax savings.
Savings May Still Be Possible This Year
In this series, we are going to focus primarily on ways you can use retirement plans to save money on your taxes, and some of these savings may even be possible with last year’s taxes. But especially if you anticipate paying more in taxes this year, this information will help you make the appropriate adjustments and guide you to make changes early, so you have a reduced tax liability next year.
Stay tuned as we will discuss cash balance plans in detail next month and how you can use them to potentially save on your tax liability next year.
Chris Zeches is a Certified Financial Planner® and Managing Partner at Zeches Wealth Management. Zeches Wealth Management has one singular focus: To financial planning and tax expertise to help multi-generational families and business owners achieve more of what they love.
Have A Question?
If you have questions that are specific to your family’s situation, feel free to contact us and we will do what we can to help.