Author: Ronica Brown | Estimated Reading Time: 3 minutes
Tax season is often your worst nightmare.
You’re calling your accountant at ungodly hours trying to figure out how to pay less taxes as a business owner.
It often seems like the IRS is robbing you blind!
Can you deduct your child’s tuition? What about your retirement savings or that fancy car you bought that you didn’t really need? Are tax credits better than tax deductions?
You have so many questions, but the answers you’re finding aren’t quite what you’re looking for.
That’s why I’ve created this comprehensive tax savings blueprint. You’ll learn:
How to pay less taxes as a business owner
How to create an effective tax savings plan
How to capitalize on tax credits for small businesses
How to create a solid financial plan that creates long-term tax savings
Why you need a tax advisor, even when you love your CPA
The truth is that the American tax system is structured in a way that provides the greatest tax benefits to people who want to grow their businesses and increase their wealth. Owning a profitable business is favored over earning a salary from a traditional job.
This blueprint will teach you how to maximize the tax benefits available to business owners.
Use the Table of Contents below to navigate through this comprehensive guide.
Tax Advisor vs Traditional CPA - What’s the Difference?
Key Members Of Your Finance Team
How Can You Create a Tax Savings Plan?
How Can You Lower Your Business Taxes?
How Much Should A Small Business Save For Taxes?
What If You’re Paying More Than $100,000 in Taxes?
Tax Advisor Vs Traditional CPA - What's the Difference?
I’ve discovered that many business owners don’t know what accountants really do. They think that CPAs, accountants and bookkeepers do the same thing. But, their roles are very different.
CPAs can specialize in many fields including:
Tax preparation
Tax planning
Tax credits
Valuation
Auditing
Tax resolution
Tax advisors are licensed CPAs or tax attorneys, but their approach to (and understanding of) tax laws differs considerably from a traditional CPA. Their expertise spans tax preparation, tax planning, tax credits, tax resolution, and helping you pay less taxes.
There are five main differences between a tax advisor and a traditional CPA.
Tax Advisor vs Traditional CPA
| Tax Advisor | Traditional CPA |
|---|---|
| A tax advisor does have CPA training but also is a tax specialist with detailed knowledge about the tax system and tax laws. | A traditional CPA understands how to prepare accurate financial statements that meet accounting standards. Most traditional CPAs learn taxes while completing your tax returns. |
| Experience is usually on a tax advisor’s side. They have usually spent years working with companies to identify and implement tax saving strategies. | Traditional CPAs are trained to prepare tax forms, not to identify and implement tax saving strategies. |
| A tax advisor uses your existing financial records to analyze the best ways to reduce tax payments. | Good financial record-keeping, budgeting, and general financial planning are a traditional CPA’s main focus. | It’s often not difficult to reach a tax advisor because this person’s focus is solely on tax savings planning and tax reduction. | Traditional CPAs are spread thin providing accounting, bookkeeping, payroll, and auditing services. They don’t specialize in tax planning and are often difficult to get a hold of during the year. |
| A tax advisor measures success based on the amount of tax savings you get as a business owner. | Traditional CPAs measure their success based on meeting tax deadlines and claiming basic tax deductions. |
I’ve seen the good, bad, and ugly of the accounting world in my 15+ years as a tax professional. Clients have come to me with botched financial records and statements hoping that I can use them to find some tax savings. I’ve also had clients come to me who use a bookkeeper to do all their accounting and tax work. What a hot mess!
A bookkeeper is not an accountant! Yes, an accountant with a CPA license can do bookkeeping but a bookkeeper can’t do everything an accountant does. A bookkeeper reports on the financial pulse of a business by keeping track of all business transactions and using those transactions to create financial statements.
Also, a good bookkeeper can create a profit and loss statement, balance sheet, and cash flow statement without missing a single detail of your business’ daily transactions.Your bookkeeper should not be doing your taxes.
Traditional CPAs (or accountants) do deeper analysis than the bookkeeper. They ensure that everything the bookkeeper does is accurate according to accounting rules. They can also audit your financial statements and provide an opinion on the health of your business. Projections, budgeting forecasts, and other forms of analysis are also a part of what they can do.
Furthermore, traditional CPAs are trained to do this type of accounting related work rather than deep tax analysis. They can file your taxes but chances are they won’t capitalize on tax savings strategies because that isn’t their area of expertise.
The truth is that many traditional CPAs don’t know enough about the tax laws to understand the loopholes that can be legally used to help you pay less taxes as a business owner. So, their tax saving recommendations are often limited to:
Buying more equipment
Delaying collecting your money (increasing your accounts receivable figure) or delaying your sales
Retirement contributions
Just paying what you owe
Why Do You Need A Tax Advisor?
Your tax advisor is an additional member of your accounting team and provides another set of eyes for your finances. A fresh set of eyes helps with proper checks and balances. It’s often best to not have the same person doing both your accounting and your taxes, especially if you aren’t financially savvy.
The most important qualities of a good tax advisor for a small business are:
The person’s background, education, and experience should reflect detailed knowledge of tax planning
Signs that the person is keeping abreast of changes in tax laws
Being business minded
An approach that puts the client at the center
A tax advisor deeply analyzes your financial statements and business goals to find ways to maximize your deductions, help you pay less in taxes, and help you keep more of your hard earned money. Inevitably, your tax advisor should help you reduce your tax bill by using all the tax benefits allowed by the IRS.
This alone is a full-time job. So, traditional CPAs don't have the time to implement sophisticated tax reduction strategies when they are already spread thin with the traditional accounting services they do offer.
The CPAs at RBA Tax Advisors have over 10,000 hours of tax savings experience. This is what we do all year so our knowledge isn’t limited to retirement savings and buying new equipment.
We only work with a handful of clients at a time. This helps us provide detailed, personalized service and deliver the results. Our clients keep more of their hard earned money.
Hiring the right tax advisor is the first step in getting the best tax benefits as a business owner.
Key Members Of Your Finance Team
A tax advisor, bookkeeper, and accountant aren’t the only people you should have on your finance team. They’re important but they can’t comprehensively cover all your finance needs.
Your tax savings plan depends on your ability to effectively mange your cash flow, invest your money and set realistic long-term and short-term finance goals. There are critical members of your finance team who can help you do that.
So, how do you know who you should choose as a part of your finance team?
The best way to simplify the decision making process is to first focus on your ultimate financial goals. That clarity helps you hire the right team member who can make those goals reality.
Here’s a list of some key additions you can consider for your finance team outside of an CPA, bookkeeper, and tax advisor.
Wealth Manager
Wealth managers deal with the highest level of financial planning for people with high net worth. Some wealth management firms require you to have at least $2 million invested before you can access their services.
Regardless, a wealth manager helps you increase the percentage return on your investments by managing your investment portfolio and giving you access to different types of investment such as Exchange Traded Funds (ETFs), forex trading, Real Estate Investment Trusts (REITs), stocks and so on. This professional is normally licensed Chief Financial Advisors (CFAs) and will have financial planners on their team who help with retirement planning.
Financial Planner
A financial planner focuses on growing the money you already have through retirement planning, insurance, and other financial products. The mix of investment and products will be based on the broker or company this professional is licensed with. A financial planner is usually a Certified Financial Planner (CFP).
Chief Financial Officer (CFO)
CFOs are responsible for managing all financial aspects of a business. They provide oversight for all members of your finance team, manage the company’s assets, and provide detailed cash flow management. Their role includes business planning, budgeting, forecasting, and negotiations.
You may not need a full-time CFO so you may want to consider a fractional CFO. This person essentially takes on the responsibilities as a CFO for your business on a part-time basis.
How Can You Create a Tax Savings Plan?
A tax advisor can help you create an effective tax savings plan for your business. The process starts with analyzing your existing tax returns to find opportunities for a tax refund. Your tax advisor uses this step to ensure you’re legally paying the least amount of taxes while remaining compliant with IRS regulations.
Tax planning is crucial to the long-term financial health of your business. Taxes are one of the most expensive business costs and they’ll only continue to increase as the years progress. A tax savings plan makes it possible to pay significantly less taxes as a business owner.
A solid tax savings plan requires deep understanding of the tax code so that you can structure your transactions around it. Some of the things your tax advisor will look at are your:
Cashflow
Business structure
Retirement planning
Investments
Here are some tips for creating a strong tax savings plan. You can access even more tips in this detailed guide.
Don’t Wait Until Tax Season
One of the most common mistakes small business owners make is waiting until tax season to figure out how to pay less taxes as a business owner. It’s too late by then!
Tax transactions should be actioned before December 31 each year. So, you need to start talking with your tax advisor about a tax savings plan as early as possible.
Outline Your Short-Term and Long-Term Financial Goals
Tax planning is a holistic strategy. It doesn’t solely focus on finding quick ways to tap into tax savings for a single tax filing period. You have to look at your short-term and long-term financial goals. For instance, do you want to…
Buy a house in the next two to three years?
Expand your business?
Invest in other business ventures?
Create generational wealth?
Essentially, you’re looking at how you want to use cash flow to create wealth. Pinpointing your goals will help you create a tax savings plan that focuses on the right transactions.
Consider Restructuring Your Business for Maximum Tax Savings as a Business Owner
You could save more on your taxes if you restructure your business. One option is to split the business into different entities and have a holding company. Another possibility is changing your business from an S-Corporation to a C-Corporation or vice versa depending on what you’re hoping to achieve with your tax savings plan.
There are some basic tax differences that you should keep in mind if you’re considering switching from an LLC to an S-Corporation. Some of these differences include:
Owners of an LLC don’t have to pay withholding tax while S-Corporation owners do.
All LLC owners pay self employment tax on all net earnings while S-Corporation owners only pay taxes on their salary.
Retirement contribution limits are based on net earnings for LLC owners. This allows for higher contributions and larger tax savings. S-Corporation owners have retirement contribution limits placed on their salaries. This is a particularly important difference as you consider retirement planning.
Read this article to learn more differences.
Claim Tax Refunds From Your Previous Returns
You can find thousands of dollars in tax savings in the tax refunds you didn’t claim from your previous returns. It’s highly likely neither you nor your CPA realized these refunds were available. A tax advisor has an eye for these details and knows how to claim missed deductions or credits by either:
Amending the tax return
Filing a method change
Keep Abreast of New Legislations
Tax laws change regularly, especially when a new president is elected. Keeping abreast of new tax laws is a big part of what a good tax advisor does.
Here’s a great example. The 2020 Cares Act brought with it tax savings for business owners. My team and I capitalized on this new legislation for one of our clients and helped her save over $88,000!
President Joe Biden is also tabling new tax legislation. This is something I’m studying very carefully to determine how to structure the best tax savings plans for my clients.
Trade Your Tax Dollar for a Tax Investment with a Good Return
The IRS will allow you to use your tax dollar for specific investments. For instance, you could trade your tax dollars for an investment in a solar energy factory.
Investing in this way means that you’ll get money in your pocket in the long-term as the investment yields returns. A good tax advisor knows the investments that qualify and how best to use this strategy to provide the best return on investment (ROI).
How Can You Lower Your Business Taxes?
There are many tax benefits for business owners. Knowing what they are and how to effectively use them will help you pay less taxes.
Here are seven strategies that you can use. There are a few others in this comprehensive guide. But, don’t use them blindly! Hire a tax advisor who can help you determine which strategies fit best in your tax savings plan.
Utilize Tax Credits
Tax credits reduce the total amount of taxes owed to the IRS. Tax deductions are different; they reduce the amount of taxable income. Filing for as many tax credits as possible will significantly help you pay less taxes as a business owner.
You get a better ROI from tax credits. Tax deductions give you a percentage savings on your taxable income while tax credits provide a dollar-for-dollar reduction. Here’s an example.
Let’s say you’ve spent $1,000 on your business. This is how tax savings would work for that $1,000 using a tax deduction versus a tax credit.
Tax Deduction
Spend = $1,000
Tax Deduction = $300
You’ve reduced your taxes by only 30%.
Tax Credit
Spend = $1,000
Tax Credit = $1,000
You’ve reduced your taxes by $1,000.
You can qualify for different tax credits depending on your:
Location (What state are you in?)
Industry
Staffing (Do you have full-time employees?)
Gender (Are you a female business owner?
Cash flow and profitability
There are also tax credits that have no requirements. You can access them with the help of a knowledgeable tax advisor.
Focus on Profitability and Cash Flow
Your cash flow statement is the most important financial statement. Profit margins are great but they mean nothing if your business doesn’t have sustainable cash flow. Cash flow gives you the power to invest in a tax savings plan that’s sure to deliver over $50,000 in tax savings. You have to pay to play.
So, create a profitable business that produces sustainable cash flow from one month to the next. A tax savings plan will only work for your business if you value:
Business growth
Creating generational wealth
Sustainable cash flow
Understand Tax Deductions
Remember that tax deductions are different from tax credits. Six of the most misunderstood tax deductions are:
Hiring your spouse
Business gifts
Business meals
Business entertainment
Business equipment
You can learn more about these tax deductions in this article. Other tax deductions vary from one business to the next. A tax advisor can help you determine which tax deductions are right for your business.
I must apply a word of caution here. You shouldn’t spend money on a whim just to capitalize on tax savings. There must be a tax savings plan in place that allows you to strategically spend your money in a way that benefits your business. Spending on the wrong things will make you cash poor and that’s terrible for tax savings!
Let’s say you spend $10,000 and your tax rate is 35%. Every dollar you spend to get a tax deduction costs you 65 cents more. So, you’ll save $3,500 in taxes on the $10,000 you spent but you’ll have $6,500 less in cash!
There’s a way for you to not spend $10,000 and still save $3,500 in taxes! A tax advisor can help you find a personalized strategy that makes this possible for your business.
You normally have to do something to get meaningful tax deductions. I’ve discussed some of the common strategies below. There are more ways to maximize your tax deductions without depleting your cash. Schedule a call with me and we can discuss what would work best for your business.
Earn More Money and Have Positive Cash Flow
Increasing your income brings more money into your business. So, you’ll have greater flexibility to move your money and benefit from tax free investments.
The tax code rewards businesses that are growing in profit and in cash flow. There are more incentives as your business grows and more opportunities for you to reduce your taxes. Your aim with this strategy is to always have enough to pay your taxes even when you don’t have to send that check to the government.
Your options are limited when there’s no cash flow in your business because of how these tax savings are structured. You have to move money, even if that money comes back to you.
Access Tax-Free Money
Your tax bracket determines the type of tax-free money you can access. Tax free money is basically money that you earn that you don’t have to pay taxes on. It relates to tax planning and understanding the tax deductions relevant to your business.
For instance, you can earn up to $75,000 tax free from the capital gains of your investments. If your total taxable income falls within the 10% tax bracket, you don’t have to pay taxes.
Keep in mind that taxable income and gross income are two separate things. So, you can earn more money and still qualify for this tax-free money.
Other examples of tax-free money include:
Hiring your spouse with a medical reimbursement plan
Gift sale leaseback
Exiting a business with tax free sale of stock
Liquidating investments tax-free
Use of resources (See below)
Use of Resources
There are different resources that you can deduct as a business owner. One of them is the value of your home if you’re using it for business purposes. You can write a check for the home’s value.
Itemized deduction has lost a lot of its value with the increase of the standard deduction since 2018. Itemized deductions are expenses that can be subtracted from adjusted gross income (AGI) whereas standard deductions are portions of income that aren’t taxable.
Standard deductions apply to all taxpayers within that tax bracket, but itemized deductions depend on the taxpayer and require more paperwork and proof of expenses. You can only claim one type of deduction, not both.
So, it’s important for you to find other ways to deduct some of these itemized costs. Such costs include:
Reimbursement for home office use
Renting your home to your business for less than 14 days
Tax Deferrals
Tax deferrals occur when you defer tax payments to another year. There are several tax deferral options with the most common being retirement plans. A tax advisor can help you identify the tax deferrals that work best for you.
The key to tax deferrals is understanding when those taxes will need to be paid so that you can have a plan to reduce (or eliminate) them on that deferral.
We use tax deferrals with our clients to help them buy more time on their cash flow. It’s normally a temporary fix. So, we always provide an extended strategy that shows them how to eliminate taxes on tax deferrals if they qualify to do so. Schedule a call with me to find out if this strategy can work for you.
How Much Should A Small Business Save For Taxes?
You don’t want to be one of those small business owners who’s scrambling to find cash to pay taxes. It’s easy to get caught in the trap of not knowing how much your small business should save for taxes. But, a percentage of your business income should be set aside each month to help cover your quarterly tax returns.
This percentage generally differs from one business to the next. So, it’s best to speak with your tax advisor to determine the best percentage to use for your business. Also, you’ll have to reassess this percentage each quarter if your income significantly increases.
What If You're Paying More Than $100,000 in Taxes?
Businesses experience different stages of growth. You may be at the point where your business is experiencing income growth that leads to a high tax bill. Also, you may be a specialized service professional like a medical doctor or engineer whose income results in spending more than $100,000 in taxes.
I can’t say this enough; a traditional CPA often doesn’t specialize in tax reduction planning and tax reduction strategies. So, you need a tax advisor as part of your financial team. That’s where you should begin if you’re serious about learning how to pay less taxes as a business owner.
There are also some tax reduction strategies listed in this free downloadable guide. The team at RBA Tax Advisors will work with you to use the strategies already mentioned in this article to lower your tax bill.
You may also like How This Business Owner Saved $502,000 On His Tax Bill.
Prepare for a Mindset Shift
Discovering how to pay less taxes as a business owner has a lot to do with your mindset. Clients often come to me either fearful about finance and taxes or completely uninterested in understanding the financial health of their business. Your approach must be different if you want the best results.
First, you need to be more comfortable with the basics of financial record keeping, financial reporting, and tax filing. Take the time to learn what your income statement, balance sheet, and cash flow statements are saying. I’m not saying that you should know how to deeply analyze your financial statements. But, you should at least understand what they’re saying.
You then need to be comfortable with making financial decisions. Sure, you should trust your financial advisor, tax advisor, and CPA to provide you with sound financial advice. Don’t leave everything to them though. Listen to what they’re saying, do your research, and provide your thoughts and opinions. Be involved in discussions about your money!
Finally, be more curious about what’s happening in your tax return. Are you seeing percentage write offs? What’s your tax advisor doing? Is what’s being done in alignment with your tax savings plan? Be curious!
How to Pay Less Taxes as a Business Owner (A Summary)
This blueprint has guided you through the fundamentals of paying less taxes as a business owner. Here’s a summary of the steps.
Hire the right tax advisor.
Work with your tax advisor to create (and execute) a tax savings plan based on your short-term and long-term goals.
Maximize on tax credits.
Focus on increasing the profitability and cash flow from your business.
Final Words
The team at RBA Tax Advisors knows how you can pay less taxes as a business owner. Putting the burden of tax savings on your traditional CPA means that you won’t maximize all possible benefits. We know how to:
Create a tax savings plan that’s specific to your business’ needs
Provide advice for restructuring your business so that you get maximum tax benefits
Apply for the right tax credits for your business
Maximize your tax deductions
Apply current tax legislation to increase tax savings for your business
Schedule a free call with me to see how my team and I can help you put more money in your pocket.
Want more insights? Download my FREE tax reduction guide by clicking here.