Do you dread filing your company taxes every year? You’re not alone – small business owners often struggle to make sense of complex tax codes and legislation. In the long term, however, strategic tax planning could help to lower your liabilities and save large sums of money. The more money in the bank at the end of the fiscal year, the more you can afford to invest in growth strategies designed to help your business thrive.

So, how can you curate an advanced tax strategy that suits the needs of your organization? Firstly, we recommend enlisting the help of a tax professional willing to work closely with you throughout the year. Many small business owners hire accountants whose sole purpose is to prepare financial statements before relevant deadlines. Unfortunately, this is not a smart strategy for business growth – you need a financial professional who can help you track income and expenditure, identify cash flow problems, monitor profits, and cut costs wherever possible.

If you’re looking to improve the efficiency of your tax plan, it’s a good idea to research advanced strategies well in advance of deadlines. Here are a few tried-and-tested techniques to bring up with your tax advisor at your next meeting:

1. Investigate the possibility of arranging a defined benefit plan

On top of personal Individual Retirement Account (IRA) contributions, small business owners have a range of employer-sponsored retirement plans at their disposal, including 401(k)s and profit-sharing arrangements. A defined benefit plan is an arrangement that allows companies to contribute more money to an employee’s retirement fund than a traditional 401(k) while entitling the business to tax deductions. Businesses of any size are eligible to utilize defined benefit plans – great news if you are self-employed or have a small number of employees. Although defined benefit plans come with several set-up fees, high-income entrepreneurs often use them to minimize their liabilities and save for a comfortable retirement.

( Source: https://napkinfinance.com/napkin/401k/ )

2. Defer your tax liability with an installment sale

Are you planning to sell your business? If you can afford to wait for full payment, an installment sale could help you avoid the tax typically paid when reporting gains on an asset. According to the Internal Revenue Service (IRS) in “Publication 537”, installment sales allow property owners to defer part of the sale of an asset, meaning they can declare distributed portions of capital gains across several years and lower their tax liability. 

3. Set up a captive insurance company

 Many small businesses struggle to secure high-quality insurance packages as their enterprises are considered high-risk. Fortunately, it is possible to cover risks by forming your own insurance company. Insurance providers owned by the businesses they protect are known as captive insurers. Premiums paid to these insurers may be tax deductible if the company’s arrangements meet risk-distribution rules set out by the IRS. You can also customize these policies to align with the needs of the business – great news if you operate in a sector with specific insurance needs. 

While most companies use captive insurance strategies for risk management reasons, it is also worth noting that businesses stand to profit if their under-writings are sound. If you can reduce claims through stringent safety policies and mitigation strategies, you may be able to enhance returns and protect the finances of your business in the long term. 

4. Secure tax breaks with Section 1202

According to Section 1202 of the tax code, business owners are not required to cover the federal tax on capital gains associated with certain small company stocks. This legislative change was introduced by the Obama administration and is commonly referred to as the Small Business Stock Capital Gains Exclusion. Section 1202 is designed to incentivize non-corporate taxpayers to make investments in small businesses and defines small business stocks as follows:

• Those issued by domestic C-corporations (not including restaurants, hotels, real estate companies, financial institutions, farms, mining companies, or organizations related to architecture, engineering, or law).

• Those issued after August 10th, 1993, in exchange for property (not including stocks), money, or as compensation for offering a service.

• At the time the stock was issued, the corporation in question must have owned $50 million or less in assets.

• At least 80% of the issuing corporation’s assets must be utilized to actively conduct one or more qualified companies. 

• The issuing corporation must not have purchased any stock from the taxpayer for a four-year period beginning two years before the date of issue.

It is also worth noting that state taxes conforming to federal rules also exclude capital gains of small company stock. However, as tax directives can differ from state to state, you should seek guidance from a financial professional about how your state treats profits realized from the sale of qualified stocks.

5. Utilize the research and development (R&D) tax credit

R&D is commonly associated with tech and pharmaceutical companies, leading many small business owners to believe they are ineligible for the government’s R&D tax credit. Contrary to popular belief, however, this underused form of tax relief encompasses a wide range of innovation efforts. You are eligible for the R&D tax credit if your company contributes to the public good by improving existing products, designing practical new products, or developing dynamic new processes that add value to people’s lives. 

To qualify for this tax credit, taxpayers must document and evaluate their research activities to work out the total sum of their qualified research expenses. While you may need to make estimates, they must be grounded in facts and backed up by qualified documentation, including project lists and notes, ledger expenses, and payroll records.  

Start preparing for tax season today!

If you’re feeling stressed about the approaching tax season, put your mind at rest by planning early. By following a few tax tips, you could save your business significant sums of money and allow for greater investment in growth strategies. Don’t hesitate to book an appointment with your tax advisor today and work together to curate a solution that works for you. 

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