Year-End Tax Planning

Well, the year is coming to an end and many business owners are meeting with their accountants and tax advisors to figure out how to reduce that inevitable income tax burden coming in April. Here are a few strategic ways to keep some more of that money at home.

Business owners are often successful in earning some money beyond the expenses of acquiring it-in short, profit. The only problem is, the profit is taxed. So, we work with our tax advisors to lower this burden by strategically spending money in various ways by the end of the year in an attempt to cut off the bleeding.

One of the most popular techniques is to "spend the money since it's going to be taxed anyway". I always get a charge out of this technique since it does not evaluate on what the money is spent. One of the laws of economics is that money derived from production must be reinvested into production to expand the organization. In other words, the expense must buy something of value that can further grow in value.

This technique can be summed up in "accelerating expenses". Next year the company will have expenses like rent, promotion and marketing, utilities, etc. Accelerating these expenses only defer the tax owed since you will have to do the same thing next year to avoid the tax. This has some limited workability, especially if you have volatility in your annual income and can pay the taxes at lower rates in a year with lower income.

There are, however, other options. One of these options is to use some form of retirement plan. These can range from a traditional Individual Retirement Account (IRA) where a person can invest up to $5000 ($6000 over age 50), to something called a "Super 401k" that combines various types of retirement plans to allow someone to contribute upwards of $200,000 or more per year. That's right. Now, the benefit of this kind of expense is that it can not only save income taxes in the current year, but it will create an additional asset of value that can be used in the future to create retirement income.

If you have a C corporation, there is a plan called a Section 79 plan (so named after the IRS Code section) that will allow a business owner to purchase cash value life insurance with potentially tax-deductible dollars. Of course, you have to purchase life insurance on your employees (inexpensive term) and you will only be able to deduct a portion of the annual life premiums, but this may make sense if you qualify for such a plan. This type of benefit plan would allow the business owner to accumulate assets inside a life insurance policy that can later be used to provide supplemental retirement income.

These are just a couple of options available to business owners besides just spending money "because it will be taxed anyway". Use the tools available to lower your taxes and build wealth for the future.