Maximizing Tax Savings for Your Business or Family Office: Strategies for Short- and Long-Term Success
October 04, 2023
Many see tax planning as nothing more than a necessary chore, but its true potential as a tool for financial growth is often overlooked. Whether you run a business or a family office, smart tax planning can lead to big savings and even bigger opportunities for long-term success.
Below, you’ll find tips that not only help you save on taxes today, but also set you up for financial prosperity in the long run.
Consider a Tax Status Change
Understanding your entity’s tax status isn’t just a box to check — it directly affects your bottom line. You may find that a well-timed tax status change could unlock significant savings from lower tax rates and a broader range of deductible expenses.
For instance, a small business switching from a sole proprietorship to an S-corporation could potentially benefit from lower self-employment taxes and greater liability protection.
On the other hand, a family office might consider changing its structure to an LLC, offering advantages like more flexible tax treatment and increased asset protection.
That said, changing your tax status is a decision that should always be made carefully and under the guidance of a seasoned Certified Public Accountant (CPA), given the financial complexities involved.
Leverage Tax Deductions & Credits
The adage, “It’s not what you make, but what you keep,” is particularly relevant during tax season. One of the most immediate ways to put this principle into action is through tax deductions, which reduce your taxable income. These span everything from office rent to employee salaries, offering a quick win come tax time.
But deductions aren’t the only way to save. Tax credits can be even more powerful – they offer a direct cut in the taxes you owe, and they’re useful for both traditional businesses and family offices.
Businesses often benefit from credits like the Work Opportunity Tax Credit for hiring from specific groups. Family offices can also take advantage of specialized credits aligning with their investment or philanthropic goals.
Optimize Timing for Revenues & Expenses
Effectively timing your ongoing revenues and expenses can also yield substantial tax-season benefits. The approach varies depending on whether you’re steering a traditional business or a family office, but the principle remains the same: Align your income and expenditures with your tax objectives to better optimize your finances.
Managing your business’s cash flow isn’t just about the here and now, so here are some specific strategies to track your income and expenses more effectively:
- Deferred Income: In years when you expect lower income or higher deductions, consider delaying some income into the next tax year. This could place you in a different tax bracket and lower your current tax liability.
- Accelerate Expenses: If this year has been particularly profitable, consider pulling planned expenses into the current year. This could be as simple as prepaying for services or making large equipment purchases, thus reducing your taxable income.
Family offices have their own unique set of circumstances, but strategic timing can be equally beneficial. Here are some tailored tactics:
- Capital Gains and Dividends: Just like in a business, timing the realization of capital gains or dividends can be tax efficient when you expect lower income in the future.
- Charitable Contributions: In high-income years, strategic timing of large charitable donations can serve to offset extra income and reduce your tax bill.
Make the Most of Retirement Contributions
Retirement accounts are often seen merely as long-term savings vehicles for employees, but their utility extends far beyond that. Both traditional businesses and family offices can reduce their taxable income with deductible contributions — and defer taxes on investment growth to significantly reduce tax liabilities. Here’s how leveraging retirement accounts for tax benefits breaks down for each.
- Employee 401(k) Contributions: Contributing to your employees’ 401(k) accounts not only serves as a critical benefit for employee attraction and retention, but also yields immediate tax advantages. These contributions are tax-deductible, effectively reducing your business’s taxable income for the current year.
- Simplified Employee Pension (SEP) Plans: These plans allow you to make tax-deductible contributions to individual retirement accounts (IRAs) set up for your employees. The contribution limits for SEP plans are generally higher than for standard 401(k) plans, allowing you to save more while reducing your taxable income further.
For Family Offices:
- Pre-Tax Contributions for Family Employees: Employed family members can contribute to their own retirement accounts on a pre-tax basis. This lowers their overall individual taxable income for the year, offering immediate tax relief and serving as an efficient income redistribution strategy within the family.
- Deferred Taxation on Investment Gains: Unlike standard investment accounts, the funds within retirement accounts grow tax-free until the time of withdrawal. This deferral of taxes on investment gains means that your money works harder for you.
Elevate Your Tax Strategy with eeCPA
Whether you’re at the helm of an evolving startup or steering the complex financials of a high-net-worth family office, eeCPA is your proactive partner in driving your vision forward. We’re not just here to prepare your taxes, we’re here to strategically guide you through them, ensuring you don’t miss opportunities or waste money.
From improving cash flow to protecting your financial legacy, we handle the intricacies so you can focus on your big picture. Ready for strategic tax planning that fuels your vision? Explore our solutions tailored to meet the specific needs of both family offices and entrepreneurs. Contact eeCPA to get started.