Top 10 Most Valuable Tax Strategies for Small Businesses

As the end of the year approaches, now is the perfect time to take stock of your finances and make moves that could benefit your tax situation. Whether you're looking to maximize deductions, defer income, or make smart investments, careful planning can make a significant difference when tax season rolls around. Here’s a list of key year-end tax tips to help you save money and ensure you're fully prepared.

1. Setup a Private Family Foundation

A private family foundation is a type of nonprofit organization funded and controlled primarily by a single family. It’s established to support charitable, educational, or religious activities and allows the family to make grants to public charities, fund specific causes, or operate programs that align with their philanthropic goals.

Unlike public charities, private foundations don’t solicit public donations; instead, they are funded by an endowment, often provided by the founding family, and typically use the investment income to make grants or fund activities. Family members often serve on the board, guiding the foundation’s mission and deciding which causes or organizations to support.

Contributions to a private foundation can reduce taxable income, potentially lowering the family’s income tax bracket. Over time, regular contributions to the foundation can provide significant long-term tax savings.

2. Hire Your Child as an Employee

By hiring your child as an employee of your business, you can enjoy tax savings by shifting income to the child, who's likely in a lower tax bracket, thus reducing the family’s overall tax liability and if the business is unincorporated, the wages paid to children under 18 are exempt from Social Security and Medicare taxes.

Additionally, wages paid to children are deductible as a business expense, reducing the business’s taxable income. Besides tax advantages, hiring family members also helps instill a strong work ethic in children, offers them valuable business experience, and can foster family continuity within the business.

However, to realize these benefits, the child’s pay must be reasonable for the work performed, and the business should document hours worked and tasks completed.

3. Evaluate Your Business Structure

Often, when a business is started a structure is chosen that is simple and cost-effective. However, as business evolves and grows more complex, it is a good idea to re-evaluate the business structure to optimize tax savings and protect assets.

4. Adopt an Accountable Plan for Your Business

An accountable plan is a reimbursement policy or arrangement used by businesses to reimburse employees for business expenses without those reimbursements being treated as taxable income.

Shareholders of sub-chapter S corporations in particular, can realize significant tax savings by strategically utilizing an accountable plan.

5. Explore Tax Credits and Deductions

There are a slew of tax credits and deductions available for small businesses. For example, there are tax credits for starting a small employer pension plan, making improvements to your facility so that it is accessible to those with disabilities, and the list goes on and on. 

6. Stash Away Dollars into a Tax-Deductible Retirement Plan

Contributing to retirement accounts not only prepares you for the future but can also provide immediate tax benefits. For older individuals, consider a Defined Benefit Plan which may allow for much larger tax-deductible contributions.

7. Rent Your Home to Your Business

Often referred to as the “Agusta Rule”, this tax loophole allows business owners to rent their personal residence 14 days (or fewer) each year to their business to host board meetings, strategic business planning sessions, management meetings, holiday parties, etc. The cost (including the fair rental value) is fully deductible by the business while the income may be excluded from personal income taxes.

8. Consider Real Estate Investments to Minimize Taxes

Investing in real estate offers many tax benefits. Whether it be long-term or short-term rentals, proper planning with a qualified tax advisor can yield large dividends. Consider cost segregation studies for real estate investments as part of your overall depreciation strategy.

9. Contribute to a Health Savings Account (HSA)

HSAs offer a triple tax advantage: contributions are tax-deductible, growth is tax-free, and withdrawals for qualified expenses are tax-free. Consider an HSA along with a high-deductible health insurance plan as part of your overall retirement strategy.

10. Evaluate Your Withholdings & Estimated Tax Payments

Review your federal and state tax withholdings to help avoid surprises when you file your tax return. For business owners, contractors, and freelancers, estimated taxes should be carefully considered.

Conclusion

Acting now to implement these tax strategies before Year-End can help you maximize deductions, minimize your tax burden, and potentially increase your refund. As with any financial decisions, consulting with the right tax advisor can provide personalized insights tailored to your situation. Contact us by email at: 16Aconsulting@gmail.com