Tax Planning Services

5 Tax Planning Strategies for Your Small Business

You may have heard the quote before: “The only two things certain in life are death and taxes.”

Unfortunately, we can’t help you with the first one, but we can surely help you with the second. The important thing when it comes to taxes is to be proactive and plan to reduce taxes with tax planning strategies. There are opportunities within the tax code to reduce your current or future tax burden, many of which you may be able to implement now.

And before we begin, I want you to think about all you’d with the extra cash. How does an extra vacation, home, or being able to travel around the world sound? That all may be possible with some tax planning strategies! Truth be told, Americans overpay billions of dollars of tax each year because they are not informed.

Considering this, we’ve compiled a list of 5 tax planning strategies you should be looking at:

1.  How would you like to have up to a $10M tax-free exit?

Check out Section 1202 of the IRS code, which pertains to the Qualified Small Business Stock (QSBS) exemption. It states that if you are an investor, founder, angel investor, or in some cases, an employee of a qualified small business, you can protect up to $10M (or more) of gains from federal taxes. Now, this code is not new; it has been in effect since 1993; however, recently it’s changed to be even more favorable to the investor.
As an investor, you are not limited in the number of small businesses in which you can invest. However, that being said, you’ll want to engage the right professional to guide you with this investment as there are very specific code guidelines and restrictions.

2.  Save on taxes through buying a property

In tax planning strategies a great way to reduce your taxable income is through purchasing a property and then having a cost segregation study done.
Standard depreciation is 27.5 years for residential real estate and 39 years for non-residential property. Cost segregation gives you a first-year deduction that is typically 5-10x what you would normally deduct.

A whole article could be written about this, but in short, cost segregation studies are performed to separate real property from personal property.

A few examples of Personal Property in tax planning strategies (contained in or attached to a structure/building):

  • Accordion Doors and Partitions
  • Carpet
  • Shelves
  • Window Treatments
  • Certain AC equipment
  • Decorative Trim
  • Neon Signs
  • Wall Coverings

A few examples of Real Property in tax planning strategies include:

  • Exterior Landscaping (15-year depreciation)
  • Fences (15-year depreciation)
  • Land (non-depreciable)
  • Docks (15-year depreciation)
  • Buildings (27.5 or 39-year depreciation)
  • Paved Parking Areas (15-year depreciation)
  • Swimming Pools (15-year depreciation)
  • Bridges (15-year depreciation)
  • Side-walks (15-year depreciation)

There are many benefits to a cost segregation study; however, there are some complications too. It’ll be important you work with a professional who can ensure it’s done correctly.

Tax Planning Strategies for Your Small Business

3.  Bonus depreciation can greatly help you reduce your taxes

Alright, so this is pretty crazy, but when you purchase the property and have a cost segregation study done, you can also utilize bonus depreciation. Bonus depreciation rules were made more favorable as part of the Tax Cuts and Jobs Act (TCJA) of 2017. While the structural value of a building will be depreciated over 27.5 to 39 years, the tangible portion of a building is allowed to be expensed immediately in the year the assets were placed into service by the business. This is known as 100% bonus depreciation and best in tax planning strategies. However, you need to hurry. The 100% treatment starts to phase out in 2023 and will be fully eliminated after 2027. Furthermore, there are complex rules around these deductions, short-term rentals, real estate professional status, and so forth, so it’s best you don’t try this at home.

4.  Set up a captive insurance company

In tax planning strategies tip number four may sound a bit more involved, and it is. For many business owners, insurance is a major expense. This is especially true for those in the health and wellness space, especially doctors. In simple terms, a captive insurance company is a privately held insurance company established to ensure the owner’s related companies. It’s a very useful tool as a supplement to traditional insurance.

Captive insurance companies are tax-advantaged, in that premium payments are deductible to the business owner and are tax-free to the insurance company itself. These companies operate as for-profit companies, allowing them to generate a profit for the owners any time the captive’s investments bring in more than is withdrawn in claims.

5.  Reduce your taxes and increase your retirement with a defined benefit plan

How would you feel knowing you will get a minimum fixed amount monthly at retirement? How about the opportunity to deduct $200K+ in each of your highest earning years?
A defined benefit plan is a type of pension plan which guarantees the recipient a defined amount of money after retirement (typically each month). The high contribution limits for high earners can make this a great way to save for the future while protecting your wealth against excessive taxes.

Reducing your taxes requires a strategic and customized approach in tax planning strategies. At Brook Bay Consulting, we help business owners every single day legally and ethically reduce their taxes. We’d love to offer you a complimentary call to see how much we could help you save on taxes. Schedule a time here.

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