For business owners, the unique challenges of balancing company needs with personal wealth management require tailored solutions, especially where tax planning is concerned. From identifying insurance solutions to retirement and exit planning, strategic tax-mitigation must be prioritized in every equation; if a dollar saved is a dollar earned, this is more applicable to high-income business owners than perhaps to any other demographic.
At HFG Wealth Management, we believe anything less than a proactive, informed, and holistic approach to your tax-planning needs is insufficient. With that in mind, we encourage you to speak with us or your tax planner well before December to identify the right opportunities for your situation. Here are a few strategies to ask us about as you consider ways to reach your personal wealth goals and maximize your business’s profitability.
1. S-Corp Tax Strategies: Balance Salary Vs. Distributions
For owners with an S-corporation structure, finding the right balance between salary and distributions is crucial for maintaining IRS compliance while minimizing payroll taxes. Unfortunately, the IRS guidelines are moderately vague–requiring you to pay yourself a “reasonable salary” based on industry averages–while the risks of getting it wrong are considerable. Paying yourself too much could result in an audit that reclassifies part of your business’s income as salary, resulting in tax penalties of up to 100% in addition to negligence penalties.
On the other hand, allocating too much to your salary results in higher distributions and, subsequently, higher payroll taxes. For small business owners, especially, filling multiple roles can make it difficult to determine what constitutes a reasonable salary. Consulting with an expert can alleviate the worry of IRS non-compliance while maximizing tax deductions. A regular review of your business structure and responsibilities ensures a model that fits the company’s evolving needs.
2. Reduce Taxes with Fixed Assets
With the passing of the One Big Beautiful Bill Act (OBBBA), provisions under the previously sunsetting Tax Cuts and Jobs Act (TCJA) have been preserved, creating numerous opportunities for business owners to reduce their tax liability. One strategy to consider is the return of 100% bonus depreciation for qualified property that has been purchased or placed in service. Properly qualifying assets through cost segregation allows business owners to maximize this opportunity, resulting in a 100% bonus depreciation for partial costs that may be claimed at the time of an asset purchase.
Owners may also be able to take advantage of a lookback depreciation deduction for assets that were not accurately segregated in the past. These deductions not only result in greater tax savings for business owners but may also generate cash flow solutions vital to profitability and growth opportunities. Working with a tax planner can help business owners properly segment depreciating assets to increase tax-saving opportunities.
3. Leverage Expanded QSBS Legislation
For late-stage startups, the OBBBA’s rulings on Qualified Small Business Stock (QSBS) mean planning a tax-advantaged exit strategy is easier than ever, thanks to capital gains exclusions that now apply to 3 and 4-year holdings, rather than the previous 5-year holding limitation. This opportunity can attract investors closer to liquidity events while still rewarding longer-term investors at the 5-year mark.
Additionally, for those in growth stages, the gross asset limitation at the time of stock issuance has been increased from $50M to $75M, expanding eligibility for business owners looking to attract investors through tax-sheltered stock.
Whether you’re accelerating your exit or raising equity, now may be a good time to ensure you’re taking full advantage of these benefits under the guidance of a wealth-planning professional.
4. Explore M&A Opportunities
Another exciting opportunity that the OBBBA has brought about for business owners is the restoration of a buyer’s ability to write off 100% of qualified tangible and intangible assets through 2029, while doubling the expense cap to $2.5M. For business owners looking to expand, now is the time to start planning tax-advantaged acquisitions. Conversely, for those looking to sell, especially as part of an exit plan, now may be a beneficial time to generate interest in your company. Strategic tax planning ensures a smooth transition and maximizes your after-tax retireability.
5. Maximize Retirement Contributions
On the topic of retireability, the unfortunate truth is that many business owners funnel capital back into the business at the cost of their retirement savings. While catch-up contributions can help make up for these lost years, there may be a better option for high-earning business owners: cash balance plans.
This type of defined benefit plan has no fixed contribution limits. Instead, an annual target balance is determined by the plan’s actuary based on plan terms, target balance, and length of time. Additionally, contributions are tax-deductible, allowing those near retirement (and likely in peak earning years) to superfund their retirement while reducing their tax liability. It’s important to note that these plans require careful structuring and consequently carry higher administrative fees, so it’s best to consult with a qualified professional.
Your Partner in Business and Personal Planning
For business owners, the need for truly holistic wealth management advice is more critical than ever. Integrating the financial needs of your business with your personal wealth and wellness goals is a standard we pride ourselves on upholding, and we’re honored to fill this role for many local business owners and CEOs. We work on your behalf to identify wealth enhancement solutions through creative tax planning and coordinate with your tax planner and family attorney to ensure seamless implementation. If you’re looking for ways to reduce your tax liability, either personally or for your business, we encourage you to schedule an appointment now. We look forward to helping you thrive.
