Top Tax Strategies for Highly Profitable Small Businesses

Reducing taxes becomes a major focus for highly profitable small businesses. At the same time, they must ensure legal compliance.

If your business expects a tax bill of over $100K, you can save thousands by optimizing accounting and implementing tax-saving strategies.

In this article, we will unveil the top strategies that highly profitable small businesses can implement to reduce their taxes by a significant amount.

1) Entity Optimization

The business structure plays a vital role in how your tax bill is calculated. The initial structure might not be the right fit for the current status of the company and tax optimizations.

As the company grows, you have the option to switch to other legal structures. For instance, LLCs have the option to be taxed like a C corporation. Moreover, owners can request an S-Corp status to maximize their tax savings. In some cases, even reverting back to S-Corp election status may be the best course of action.

The entity structure or formation optimization can result in significant tax savings. However, other factors should be considered before changing the tax status. You need to consult a professional tax advisor to select the right business structure & tax status for the business.

2) Maximize Deductions

Your business can save a whole lot of hard-earned money if you know how to maximize deductions. IRS allows different types of deductions from the taxable income. However, only professionals understand the nitty-gritty and hidden ways to maximize benefits.

Travel Expenses: You are allowed to deduct the business travel expenses, including transportation, meals, accommodation, etc.

Employee Education/Training: Investing in employees not only benefits businesses but also reduces the tax burden. The cost of training, courses, and reimbursement for education can be deducted.

Insurance: Premiums paid for the insurance, such as property, liability, and disability insurance, can be deducted — even company funded-policies. 

Property Interest Expense: The interest expenses from the SBA loan can be deducted from the taxable income.

More expenses can be deducted fully or partially, including retirement contributions, medical expenses, etc. Consulting a tax advisor would be an excellent option to unveil all possible deductions to reduce tax bills.

Depreciation: That same SBA loan originally used to purchase a business property can be depreciated to decrease the net financial obligation of the loan in cash flow terms. 

Compensation optimization:

We've found that the most effective tax planning begins with reasonable compensation of the business owner. This can mean the difference in keeping thousands of dollars that would otherwise go to taxes. 

3) Retirement and Medical Plans

It's a good idea to contribute to the retirement account of the employees and yourself. Your contributions to the plan are deducted, which reduces tax bills.

If your company has set up a 401(k) plan, it is great. If not, it can be done anytime within the tax year. The total contributions can be deducted from the income. However, it should not go over the employee's compensation for the year.

Small businesses with high incomes should also contribute to the health of employees. They can set up Health Saving Accounts (HSA) to save money for future medical needs. These are not only beneficial for the employees but also for the business owners. The whole contribution can be deducted, and when you withdraw that amount in the future for any medical need, it is tax-free.

4) Defer or Accelerate Income

Tax is billed on the generated income during the tax year. It can be controlled and reduced by deferring incomes expected at the end of the financial year.

For instance, instead of sending an invoice on 10th December, you can postpone it to the next year. Communicate with the client and defer income to reduce tax bills.

Remember, deferring income means you are transferring the burden on the tax to the next year. However, it is quite helpful if you have a higher income than expected.

Some businesses prefer to accelerate income. They try to invoice for everything and get cash before the year ends. It saves them from future tax increases and is an excellent option when the year's income is lower than expected.

Similarly, the expenses of the business can be controlled. If you want to reduce the taxable income, expenses are encouraged. And if you want to take benefits of less tax rate this year, defer expenses.

5) Hire Spouse and Children

Small businesses with higher incomes can reduce taxes by hiring their spouse and children. 

The tax on children's income has a lower rate, such as relaxations on Federal Insurance Contributions Act (FICA) and Federal Unemployment Tax Act (FUTA) taxes. Moreover, the income can sometimes be waived, depending on the age and income threshold. If the business is a sole proprietorship, it can help waive social security and Medicare taxes.

Your spouse can also work in the business, so you can have another retirement saving plan to reduce the taxable income. Secondly, the income won't be subjected to FUTA taxes. This benefit is attained if the spouse is a legitimate employee, not a partner.

6) Manage Debts

Businesses often take debts at a certain interest for capital, inventory, growth, or other purposes. If there is any interest paid on these debts, it can be deducted from the taxable income.

Moreover, businesses also have bad debts from customers and clients. These uncollectible debts can be written off from the income, which reduces the tax. However, if you receive the bad debt later at any point, you have to include it in the receivables.

7) Asset Management

The perfect timing of acquiring assets can reduce tax bills. It is preferred to acquire tangible assets that the business needs near the end of the year. If the income is high, this approach can be extremely beneficial.

For instance, if you have invested in new machinery, you can deduct the whole cost to reduce tax.

The assets you already own also undergo depreciation. If you have renovated the space, the cost can be deducted from the taxable income. Similarly, the deprecation of machinery, property, and other assets can also be deducted.

8) Consult A Tax Advisor

Tax-saving strategies can reduce taxable income and help highly profitable small businesses save hard-earned money significantly. However, the benefits can only be enjoyed if the strategies are implemented while ensuring legal compliance.

Consulting a tax advisor is essential to have a deeper understanding of the right legal structure, deductions, asset efficiency, etc. Strategic guidance and tax planning are necessary.

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Want to Implement These Tax Strategies?

FCF Consulting Partners specializes in proactive strategic tax planning for highly profitable small businesses to lower their projected tax liability. We prepare a forward-looking tax plan and help implement it to materialize projected savings. Contact us to book a time for a detailed discussion.

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