Business Owners: Boost Your Profits & Savings with These 5 Tax Strategies
Our friends at *Copper Leaf Financial have shared 5 tax-savvy ways business owners can strike a balance between operating costs and profits.
By applying these strategies, owners can reduce their tax liability, effectively boosting profits without increasing sales or cutting costs. Read below and explore how you could potentially bolster your business’s financial health, reduce taxes and help you save for retirement.
5 Tax Strategies to Consider
- Maximize Your 401(k) Deferral Contributions
Maximizing your employee contributions to your 401(k) account reduces taxable income. If you are not maxing out your 401(k) contributions each year, you’re missing out on a significant tax advantage. For 2024, the employee contribution limit is $23,000.
Individuals aged 50 or above can contribute an additional $7,500, making their total tax-deferral limit $30,500.
2. Profit-Sharing Contributions
A profit-sharing plan allows employers to make contributions to retirement savings accounts on the employees’ behalf. This incentivizes employees and provides a tax deduction for the business.
Example
Murphy’s Motors is a small business with two owners, both aged 57, and a diverse team of 20 employees. Murphy’s Motors had a profitable year and wants to fund $110,000 into the profit-sharing plan. After talking with their third-party administrator (TPA), the owners learn they can allocate $43,500 into one of the owner’s accounts, $43,500 into the other owner’s and $23,000 into eligible employees’ accounts while deducting $110,000 from the company’s taxable income.
3. Cash Balance Plan
Cash balance plans are a type of defined benefit retirement plan. They offer an advantage to business owners by allowing them to contribute substantially larger annual amounts in comparison to other retirement plans, such as 401(k)s.
Example
The owners of Murphy’s Motors are eager to accelerate their retirement savings. They each anticipate compensation of $250,000 for the current year. After maximizing their 401(k), catch-up and profit-sharing contributions, they aim to each contribute and deduct an additional $100,000 toward their retirement savings. Upon consulting with their TPA, they discover that to achieve their combined savings goal of $200,000, they will need to contribute $50,000 toward their employees’ retirement plans. This results in a substantial $250,000 tax deduction for their business.
4. Health Savings Account (HSA)
An HSA is a tax-advantaged medical savings account for individuals enrolled in a high-deductible health plan (HDHP). Contributions to an HSA reduce taxable income. The funds grow tax-free and withdrawals for qualified medical expenses are tax-free. For 2024, the contribution limits are $4,150 for individual coverage and $8,300 for family coverage. At age 55, individuals can contribute an additional $1,000.
5. Hiring Family Members
Hiring family members can be an effective tax strategy for business owners. By employing family members, you can transfer income from a higher to a lower tax bracket, potentially reducing your overall tax liability. The wages paid for legitimate work are deductible business expenses. They may also share in the retirement plan benefits.
Example
Consider Joan Murphy, co-owner of Murphy’s Motors. She employs her teenage son, Alex, for daily operations at the shop. Alex’s wages are now a deductible business expense, and he is eligible to participate in the retirement plan. If his earnings stay under the standard deduction of $14,600, they remain tax-free.
Every business is unique, with its specific challenges, opportunities, and goals. That’s why we’re here to help you explore these potential strategies, understand their implications, and implement the ones that are right for you. Contact us today for more information.
*Copper Leaf Financial is an affiliated and separately registered entity.
This post is shared by Davis & Hodgdon CPAs as a service to our clients, business associates and friends. Recipients should not act on the information presented without seeking prior professional advice. Additional guidance may be obtained by contacting us at 802-878-1963 (Williston) or 802.775.7132 (Rutland).
