5 Ways Business Owners Can Reduce Taxes Now

Submitted by JMB Financial Managers on June 22nd, 2023

Did the 2022 tax season leave you feeling blue? For many small business owners, the sting of their annual income tax return hasn’t worn off yet. Now is the perfect time to regroup and revamp your strategy for tax year 2023 and beyond. In this article we’re going to discuss five ways business owners can maximize tax deductions, reduce taxable income, and start lowering their taxes now:

Start a Company Retirement Plan
Provide Fringe Benefits to Employees
Evaluate Your Business Structure
Maximize your Trump Tax Cut
Implement the Pass-Through Entity Tax

Start A Retirement Plan

Implementation of a company retirement plan has many tax benefits and yet of small businesses with under 50 employees, only 63% offer a retirement plan.

One of the basic benefits of setting up a retirement plan includes contributions that can be deducted for business income-tax purposes. In addition, earnings on the plan’s investment accumulate tax free.

There is a federal tax credit for employers who establish a company retirement plan for the first time.

When considering a retirement plan you have quite a few options available to you including:

Savings Incentive Match Plan for Employees (SIMPLEs)
Simplified Employee Pensions (SEPs)
Profit Sharing plans
Pension plans
401(k) plans

Each plan has its own set of benefits and features in addition to contribution limits and set-up deadlines. For more information on this opportunity, reach out and schedule a complimentary consultation to discuss your business situation and how a retirement plan could benefit you and your employees.

Offer New or Additional Employee Benefits

Employment tax costs rise as your company grows. As an employer, you can mitigate these costs by paying for certain fringe benefits. Some of the fringe benefits you might consider offering to your employees are:

Health Insurance
Health Savings Accounts
Long-term Care Insurance
Disability Insurance
Commuting and Parking Assistance

There are a number of additional employee benefits you could also consider. To find the best fit for your business and tax situation, review the Employer's Tax Guide to Fringe Benefits from the Internal Revenue Service.

Choosing the Business Structure That's Right for You

The business structure you choose to operate under can have a significant impact on your tax outlook. For instance, those operating as a sole proprietorship or in a partnership may experience higher taxes than those operating as a Limited Liability Company (LLC) or an S Corporation. On the other hand, forming a C corporation offers the potential advantage of paying dividends to the owner, which are taxed at a lower rate than wages and profits often are.

Each type of business structure comes with its own set of tax benefits; we suggest getting assistance from an attorney and your CPA when choosing the best legal entity for your business. For more on restructuring your business, and the tax benefits associated with different business structures, see our collection of articles on incorporating:

Maximize Your “Trump Tax Cut”

Prior to 2018, the net taxable income from pass-through entities was simply passed through to owners. It was then taxed at the owners’ individual income tax rates. In other words, they did not receive any special tax treatment applied to pass-through income recognized by business owners.

However, for tax years beginning in 2018 through 2025, the Tax Cut and Jobs Act (i.e., Trump Tax Cut) established a new deduction for an individual business owner’s qualified business income (QBI). The deduction generally equals 20% of QBI, subject to restrictions that can apply at higher income levels. Said differently, 20% of the profits passed through to the owners of sole proprietorships, general partnerships, limited liability companies, and S corporations are free from federal income taxes. (Not all states recognize this deduction, so it may not lower your state taxes.)

The deduction generally isn’t available for income from service businesses such as most professional practices other than engineering and architecture, as well as businesses that involve investment services such as financial advisory services if an individual owner’s taxable income exceeds $157,500 ($315,000 for joint filers).

Implement the Pass-Through Entity Tax

The original 1913 federal tax code allowed taxpayers to deduct state and local income and property taxes paid from their federally taxable income. Since state and local taxes are mandatory payments, the state and local tax (SALT) deduction prevented double taxation.

Then, in 2017, the Tax Cuts and Jobs Act came along and limited the SALT deduction to $10,000 per year. This has been detrimental for taxpayers in heavily taxed states such as California, Hawaii, New Jersey, Oregon, and New York.

In November 2020, the Internal Revenue Service (IRS) issued a notice (Notice 2020-75) clarifying that certain pass-through entities (like LLCs and S corporations), were not subject to the SALT deduction cap in response to a petition from the state of California.

Critically, this IRS ruling meant that the $10,000 cap only applies to state and local taxes paid by individual taxpayers and not those paid by owners of pass-through businesses. This ruling means that business owners may now have their company pay their state income taxes and not be limited to the $10,000 SALT deduction limit. The net result: business owners can pay fewer federal taxes.

Change Your Tax Outlook Today

It’s not too late to adjust your tax strategy and reduce your personal taxes for 2023 and beyond. If you find yourself in need of assistance, schedule a complimentary consultation with JMB Financial Managers, to discuss how you can implement new strategies to take advantage of tax laws and reduce your tax liability.

About the Author

Jack Brkich III certified financial planner and president of JMB Financial Managers Irvine, California Jack Brkich III, is the president and founder of JMB Financial Managers. A CERTIFIED FINANCIAL PLANNER^TM, Jack is a trusted advisor and resource for business owners, individuals, and families. His advice about wealth creation and preservation techniques have appeared in publications including The Los Angeles Times, NASDAQ, Investopedia, and The Wall Street Journal. To learn more visit https://www.jmbfinmgrs.com/.

Connect with Jack on LinkedIn or follow him on Twitter.

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