3 Strategies Business Owners Can Use to Trim Their Tax Bill.
While many businesses understandably view tax season as the ideal time to explore strategic tax options, tax planning shouldn't be a seasonal activity. It should be done year-round.
Proactive tax planning can help you maximize tax-saving opportunities and minimize tax liabilities each tax year, so now is as a good a time as any to start thinking about your 2022 filing.
Here are three powerful strategies to consider to lessen the coming year's tax burden:
1. Take the qualified business income deduction (QBI) deduction
Individuals (as well as trusts and estates) who own so-called pass-through businesses — sole proprietorships, partnerships, limited liability companies (LLCs) and S corporations — may qualify for this special 20 percent deduction on the business income of entrepreneurs. In 2020, to qualify for the full deduction, your taxable income must fall below the $163,300 threshold for single filers or $326,600 for those married and filing jointly. Above these thresholds you can still qualify for a 20% deduction, but the amount is capped at 50 percent of total wages paid by the business that generates the pass-through income. And here’s the catch: that includes wages paid to the owner. An aggressive tax-planning strategy would consider increasing the owner’s wages, which would simultaneously reduce the business income flow-through. The result: zero taxable income, while increasing the QBI deduction. Other factors to consider with higher wages are FICA taxes and a reduced PTET tax deduction benefit. Consult a seasoned accountant for specific advice.
2. Claim S. corporation pass-through losses
Business losses of S corporations, whose tax items pass through to shareholders on a pro rata basis, can be claimed as a deduction on owners' individual tax returns. But there are strict rules that govern the amount that may be deducted. Taxpayers who own pass-through entities (PTE) face four limitations on claiming businesses losses: 1) stock and debt basis rules; 2) at-risk rules; 3) passive loss rules; and 4) excess business loss rules. Business owners should consider each of these limits when planning a deduction from an expected loss. If this sounds complicated, it can be. A taxpayer may benefit by infusing additional capital into the entity before the year ends to increase their stock basis, allowing them to utilize losses otherwise excluded.
3. Harvest your investment losses to offset capital gains
A strategy used by savvy investors, tax-loss harvesting involves deliberately incurring losses in a taxable portfolio by selling off investments that have lost value. By doing so, investors can offset capital gains made on any investment assets that they’ve sold for a profit. Whether or not you should harvest losses depends on three factors: your tax rate (generally, the higher your tax bracket, the more it makes financial sense), the impact of harvesting on investment diversification/allocation and the trading fees involved. Your tax professional can help you to assess the pros and cons of tax-loss harvesting.
Teitelbaum & Co. works with businesses to ensure that they take full advantage of every available deduction, write-off or credit to reduce their tax burdens. To discuss your unique situation, contact us at 718-388-7168.