Tax Planning for Business Owners: An Annual Checklist of Strategies to Review
Tax planning for business owners works best as a yearly habit, not a scramble in March. Profits change, the law changes, and your goals for the business and your family change. A strategy that made sense when you had three employees may not fit when you have thirty, or when you start thinking about a sale.
This checklist covers the areas business owners and their advisors often review each year, from entity structure to retirement plans, along with how each one connects to building personal wealth. Not every item will apply to you, and each should be evaluated against your specific facts.
Start Here: A Complimentary Wealth and Tax Review
A fresh set of eyes on your business and personal returns, side by side, may surface questions worth asking. Compound offers a complimentary, no-obligation wealth and tax review that may include:
Business and personal tax returns: how income flows from the company to you
Entity structure: whether your current setup still fits your size and goals
Retirement plan: how much room your plan creates for owners
Upcoming investments: equipment, real estate, hiring, or expansion
Exit timeline: how near-term decisions may affect a future sale
Request your wealth and tax review.
Why Tax Planning for Business Owners Needs a Multi-Year View
Many choices that reduce taxes this year can increase them later, or the reverse. Accelerating depreciation lowers taxable income now but may create recapture when assets are sold. Deferring income helps only if next year's rate is not higher. Good business tax planning models several years at once and ties those projections to your personal financial plan, including retirement and exit goals.
The Annual Checklist
1. Revisit Your Entity Structure
Sole proprietorships, partnerships, S corporations, and C corporations are taxed differently on profits, owner pay, and an eventual sale. As income grows or plans change, the structure that once fit may not be the most efficient. Changing entities has costs and consequences, so model the options before acting.
2. Set Reasonable Owner Compensation
S corporation owners who work in the business generally must pay themselves reasonable wages before taking distributions. Setting that figure thoughtfully, and documenting how you arrived at it, matters for both payroll taxes and retirement plan contributions tied to wages.
3. Review the Qualified Business Income Deduction
Owners of pass-through businesses may be eligible for a deduction on a portion of qualified business income. Income limits, the type of business, wages paid, and property held all affect eligibility. Compensation and entity decisions can change how much of the deduction is available.
4. Evaluate the Pass-Through Entity Tax Election
Many states, including Wisconsin, allow certain pass-through entities to elect to pay state income tax at the entity level. This may help owners work around federal limits on deducting state and local taxes. Whether it helps depends on your ownership, income, and state filing situation.
5. Choose the Right Retirement Plan
Retirement plans are one of the most common income reduction strategies for owners. A 401(k) with profit sharing, a SEP IRA, or a cash balance plan may allow larger tax-deferred contributions. Annual limits apply, and employee coverage rules affect cost. The best fit balances tax savings with what you want to provide for your team.
6. Plan Equipment and Property Purchases
Section 179 expensing and bonus depreciation may allow faster deductions for qualifying equipment and certain improvements. Owners who own their building may also consider cost segregation. These tools are often used for offsetting business income in high-profit years, but timing purchases only for tax reasons can strain cash flow. Learn more about bonus depreciation strategy and cost segregation for business owners.
7. Time Income and Expenses
Cash-basis businesses may have some flexibility in when they bill, collect, or pay expenses near year end. Accurate monthly books make these decisions possible. Client accounting services can help keep financials current enough to plan with.
8. Look for Credits
Research activities, certain hiring, and energy-related investments may qualify for tax credits. Credits reduce tax directly, so they are worth reviewing even for businesses that do not think of themselves as innovators.
9. Use an Accountable Plan and Review Benefits
Reimbursing employees, including owners, for legitimate business expenses through an accountable plan may keep those reimbursements out of taxable wages. Health insurance and other benefits have their own rules depending on your entity type.
10. Pay Family Members for Real Work
Employing family members who perform genuine work at reasonable pay may shift some income to lower brackets and create retirement savings opportunities for them. Documentation matters.
11. Keep Estimated Payments on Track
Large swings in profit can leave quarterly estimates too low or too high. A midyear projection can help avoid penalties and free up cash you may not need to send in.
Connecting Tax Savings to Personal Wealth
Tax savings are most useful when they go somewhere. Money saved through a retirement plan or a lower tax bill can fund a diversified portfolio outside the business, which may reduce your dependence on one asset. That is why tax planning and preparation and wealth management work best together. Our guides on business tax planning in Wisconsin and tax and financial planning for private company owners go deeper.
To see how reinvesting annual tax savings may grow over time, try the Compound calculator. Results are hypothetical and for illustration only.
Compound works with business owners throughout Wisconsin, including Milwaukee, Madison, Green Bay, Appleton, Waukesha, Kenosha, and Sheboygan, as well as surrounding areas. Request a complimentary wealth and tax review to start this year's checklist.
Frequently Asked Questions
When should business owners do tax planning?
Throughout the year, with a midyear projection and a fall review before year-end decisions. Waiting until tax season limits your options to reporting what already happened.
What are common strategies for offsetting business income?
Retirement plan contributions, depreciation on qualifying purchases, credits, accountable plans, and timing of income and expenses are common areas to review. Each depends on your facts and cash flow.
What income reduction strategies work for S corporation owners?
Setting reasonable compensation, retirement plan contributions, the qualified business income deduction, and a pass-through entity tax election may all be worth discussing with your CPA.
Should I buy equipment at year end to lower taxes?
Only if the business needs it. Section 179 and bonus depreciation may accelerate deductions, but spending money mainly for a deduction can hurt cash flow and may create recapture later.
How does tax planning for business owners connect to wealth management?
Tax savings can fund retirement accounts and investments outside the business, and tax decisions today affect exit planning later. Coordinating both helps keep the business and personal plans aligned.
Compound is a registered investment adviser. Registration does not imply a certain level of skill or training. This article is for informational and educational purposes only and should not be construed as personalized investment, tax, or legal advice. Tax laws are complex and subject to change. Strategies discussed may not be suitable for everyone, and there is no guarantee that any strategy will achieve its objectives or reduce taxes. Calculator results are hypothetical, are not guarantees of future results, and do not reflect any actual investment. Investing involves risk, including possible loss of principal. Please consult your tax, legal, and financial professionals before acting on any information in this article. For more information, see Compound's Form ADV, available at adviserinfo.sec.gov.
About Compound Wealth
Tax planning often intersects with investment decisions, business ownership, retirement planning, and other financial considerations. Compound Wealth provides an integrated approach that combines tax planning, wealth management, accounting, and business transition services to help clients evaluate financial decisions from multiple perspectives as part of an ongoing planning process.
