Savvy strategies to lower your company’s taxes
The fourth quarter of 2018 is underway, and if you’re a business owner, it’s a great opportunity for you to review your finances, especially your potential tax burden.
One of President Trump’s aims coming in to office was to lower taxes. The reforms he’s putting in place, while still being sorted out by tax professionals and taxpayers alike, are accomplishing that goal.
Slashed tax bills have helped boost bottom lines across the nation. And while much of the year is already in the books, there is still time to lower your tax burden and improve cash flow.
Decrease Taxable Income
One of the obvious ways to pay less in taxes is to lower your taxable income. While decreasing income seems counterintuitive, it can be done so you benefit.
Perhaps the most popular way is through pre-tax contributions to a retirement account, like a 401(k) plan. Workers contribute money towards their plans before any taxes are withheld, so the amount of income that is taxed is smaller.
If your company doesn’t have a 401(k) plan, consider establishing one. There are many options to fit businesses of all sizes — from sole proprietors to large firms.
While the primary benefits of a retirement plan are employee recruitment and retention, there are also tax benefits for companies. For instance, employer contributions are tax-deductible. And there could be tax credits and other incentives available to offset costs for starting a plan.
Beyond retirement plans, we’re also approaching the time of year-end bonuses and raises. These are great ways to reward and incentivize employees, but they also carry tax consequences.
A slightly different way to recognize and reward employees while also offsetting taxes is to contribute more towards premiums for company-provided insurance plans, like health insurance.
Employees will almost certainly appreciate the lower costs. At the same time, companies contribute to employee well-being while avoiding the payroll taxes associated with a raise or bonus.
To be clear, I’m not suggesting owners pay insurance premiums instead of giving raises. The idea is meant to be incorporated alongside other reward and recognition programs, like raises and bonuses.
Another alternative is using life insurance as a basis for compensation. Typically, this is done for owners, executives, and other key employees.
Usually the company pays for a life insurance policy on the employee’s behalf, and the employee’s family would receive the death benefit.
Companies can also use cash-value insurance, like indexed universal life policies, to not only provide a death benefit, but generate income as well. As value builds in the policy, the company or the employee can take advantage of those proceeds, depending on how the deal is structured.
There are several ways to structure life-insurance-based compensation plans, each with their own tax implications. But in general, insurance-related payments made by the company are tax-deductible.
Overall, it’s a win-win. Employees get free or low-cost life insurance to protect their families, and firms can retain and compensate employees in a creative, tax-advantaged way.
Finance Insurance Premiums
Business owners appreciate that running a business is often a game of give and take. In other words, a benefit in one area often comes with a cost in another. How owners balance those relationships can make a big difference in overall company performance.
So if your firm is taking steps to decrease taxes, a great way to further leverage those savings is by financing insurance premiums. Essentially, this means having a third-party lender combine your policy premiums into one loan that you make regular payments on, including interest.
This strategy offers the reliability of steady payments and predictable cash flow. Plus, any interest paid throughout the year is tax-deductible.
Act Now, But Get Help
If nothing more President Trump’s plan has created a lot of opportunity for taxpayers, particularly those who own businesses. But as with most opportunities, the window to take advantage is likely to be limited.
In other words, act now before the chance is gone.
The problem is, that’s easier said than done. Taxes, compensation plans, and premium financing can be complex. That’s why it’s a must to work with experienced financial and legal professionals.
If not, there could be errors that end up costing you dearly, and it doesn’t take an owner to know that costly, long-lasting mistakes are bad for business.
Holly Peterson is the owner of Elite Retirement Strategies and a former radio show host. You can find her online at eliteretirementstrategies.com or by calling 208-252-4345.