Tax planning is crucial for business owners to take proactive steps to ensure their financial health and preparedness. Here are eight essential tasks every business owner should consider taking.
1. Have a Tax Planning Meeting
One of the most important steps is to have a tax planning meeting with your advisors. This includes not just your CPA but also your financial advisor and tax attorney. Bringing everyone together to review your financials ensures that all aspects of your tax strategy are aligned and working towards minimizing your tax liability. Most people wait until after the year ends, and then they try to come to their professionals to tax plan. By then, it is too late to make significant impacts like you could if you were planning throughout the year.
2. Review Your Succession Plan
It's essential to review your succession plan or create one if you haven't already. At a minimum, I recommend reviewing this every two to three years or after any major life event. This plan ensures that your business can continue smoothly if something happens to you. It also covers your personal life, ensuring your family's needs are taken care of in case of an unforeseen event. Having a clear plan in place can prevent significant disruptions and provide peace of mind.
3. Hold an Annual Meeting
For each entity you own, ensure you hold an annual meeting and record meeting minutes. This practice, common among large corporations, involves reviewing financials, assessing past goals, and setting future objectives. It also provides an opportunity to deduct travel and meal expenses related to the meeting, provided these expenses are documented and business-related. Guess what.. You can also have some fun during these meetings so long as you satisfy the time requirements
4. Implement Income Shifting
Income shifting involves transferring income from your business to a family member in a lower tax bracket. This strategy can result in substantial tax savings. For example, paying a college-aged child for reasonable services they provide can lower your taxable income and reduce overall family tax liability. It's important to structure this correctly, often through a family management company, to avoid self-employment taxes.
5. Take the Home Office Deduction
Many business owners work from home, especially after COVID-19. The IRS allows a home office deduction for spaces used exclusively for business. This deduction can cover a portion of rent, utilities, and other home-related expenses, provided you have a designated workspace and can substantiate your claims.
6. Utilize the Augusta Rule
The Augusta Rule allows you to rent your home to your business for up to 14 days per year without reporting the rental income. This rule, originally created for residents of Augusta during the Masters Tournament, can be applied to any business owner, providing a tax-free way to deduct business-related use of your personal residence.
7. Prepay Expenses
Prepaying expenses can be a useful strategy for both business owners and individuals. For business owners, this might include prepaying professional fees, office equipment, or other significant expenses to take advantage of the current year's tax deductions. For individuals, prepaying property taxes or medical expenses can help surpass the standard deduction threshold by itemizing on your schedule A on your tax return.
8. Form or Dissolve Entities
The Corporate Transparency Act, effective next year, requires reporting of beneficial ownership and management for every business entity. To avoid penalties and ensure compliance, dissolve any unnecessary entities before year-end and consider the implications for any new entities you form. This proactive approach can save you from significant fines and administrative burdens.
Conclusion
It's vital for business owners to engage in thorough tax and financial planning. From reviewing succession plans to taking advantage of tax deductions, these steps can help secure your business's financial future. For tailored advice and assistance, consider scheduling a consultation with a tax professional or attorney. As always with any deduction you take, you must be able to substantiate it so good recordkeeping and bookkeeping is necessary.
For more information and to schedule a discovery call to see if we are a good fit, visit www.bristertaxlaw.com.
By implementing these strategies, business owners can protect their assets, minimize tax liabilities, and ensure a smooth transition into tax season.
By Anthony Brister, J.D, Tax LL.M, Founder of The Brister Law Firm, PLLC
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