Boosting Profits and Savings: 5 Tax Strategies for Business Owners
For business owners, striking a balance between operating costs and profit is the cornerstone of success.
Operating costs include everyday expenses like salaries, rent and supplies. Profit, on the other hand, is what remains after all these operating costs have been paid. It's the reward for the risks taken and the value created by your business. Often, savvy business owners will look to tax strategies to help find the sweet spot, where operating costs are managed efficiently while maximizing profit.
By utilizing tax-friendly strategies, owners can reduce their tax liability, effectively boosting profits without increasing sales or cutting costs. Let's delve into some of these strategies and explore how they could potentially bolster your business's financial health, reduce taxes and help you save for retirement.
5 Tax Strategies to Consider
1. Max Out 401(k) Contributions
Maximizing contributions to your 401(k) account on a Pre-tax basis reduces taxable income. If you are not maxing out your 401(k) plan 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.[1]
2. Profit Sharing Contributions
A profit sharing plan allows employers to make contributions to retirement savings accounts based on the company's profits. This incentivizes employees and provides tax benefits for the business.
3. Cash Balance Plan
These are types of defined benefit retirement plans. 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.
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.[2]
5. Hiring Family Members
While this may sound odd, 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.
Every business is unique, with its own 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.
[1] Internal Revenue Service. “401(k) and Profit-Sharing Plan Contribution Limits.” 2023.
[2] Internal Revenue Service. “Rev. Proc. 2023-23.” May 2023.
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