<\/p>\n\n\n\n
When it comes to income taxes, many people assume that saving means spending more money on eligible deductions. While certain expenses can be deductible, tax planning is much more than just blindly spending more money to save in income tax. Smart tax planning involves restructuring your finances, optimizing deductions, and making strategic decisions that can save you significant money without necessarily requiring excessive spending. <\/p>\n\n\n\n
The Misconception: Spending to Save<\/em><\/strong><\/p>\n\n\n\n A common misconception about tax planning is that you need to spend money on deductible items to save on taxes. For instance, some individuals might purchase expensive vehicles or luxury items, thinking they can offset their tax liability by writing off these expenses. However, this approach leads to spending more money than the actual tax savings.\u00a0 Deductions aren\u2019t dollar for dollar tax savings like some tax credits are.\u00a0 You are only saving a fraction of the total expense, depending on your tax rates.\u00a0 Let’s examine why this strategy can be ineffective:<\/p>\n\n\n\n Example: Buying a $70,000 Vehicle<\/p>\n\n\n\n Imagine you buy a $70,000 vehicle for your business, and your tax advisor tells you that you can save $14,000 in income taxes by fully deducting it as depreciation (assuming its 100% business use).\u00a0 In reality, this is surface level tax planning and isn\u2019t really strategic.\u00a0 You effectively spent $56,000 on the vehicle.\u00a0 If you didn\u2019t really need a brand new vehicle then you put yourself $56,000 in the hole.\u00a0\u00a0 However, if there is a business need to purchase a new vehicle then of course speak to your tax advisor and attorney about the timing of that purchase and how best to structure its ownership (personally or through the company, lease-back, etc). However, this is usually not the case and the purchase is completely tax motivated.<\/p>\n\n\n\n Effective Tax Planning: Strategic Alignment & Long-Term Thinking<\/em><\/strong><\/p>\n\n\n\n Rather than focusing on spending to save, effective tax planning often involves restructuring your financial situation and strategically looking at your income and expenses to optimize available tax deductions and tax credits. Strategic tax planning must start with what the goals are for the business \u2013 both short term and long term \u2013 and what tax opportunities there are that align with those goals.\u00a0<\/p>\n\n\n\n Also, you must consider what your tax rates are going to be both now and in the future.\u00a0 Considering your future ~3 years of tax rates and what your income will be in retirement is critical in making tax decisions today.<\/p>\n\n\n\n If saving income taxes now does indeed make the most sense after going through that analysis, then consider some of the below tax efficient savings opportunities. \u00a0However, it may make more sense to accelerate income and defer tax deductions into years where your tax rates will be higher.<\/p>\n\n\n\n a. Tax Credits<\/p>\n\n\n\n Businesses may already be spending money that would otherwise qualify for income or payroll tax credits, which can be dollar for dollar tax savings (but not always!).\u00a0 However, they may not have enough documentation to qualify for the credit or perhaps just don’t know they exist.\u00a0 <\/p>\n\n\n\n For example, research & development (“R&D”) tax credits require a significant amount of documentation to qualify for the income or payroll tax credits, on top of the activities actually qualifying as R&D.\u00a0 Installing a better process to contemporaneously document the R&D activities could mean qualifying for the R&D credit saving thousands of dollars in income or payroll taxes. It\u2019s an indirect cost to build a more robust documentation process to be sure, but it\u2019s something that could pay off in other ways such as creating internal efficiencies.<\/p>\n\n\n\n The Workers Opportunity Tax Credit and FICA Tips Credit are two other business tax credits that many businesses may qualify for but don\u2019t know it and their tax advisors aren’t asking about it.<\/p>\n\n\n\n b. Retirement or Pension Contributions<\/p>\n\n\n\n Contributing to retirement accounts, such as 401(k)s or IRAs, can be a good way to reduce your taxable income. You aren\u2019t \u201cspending\u201d, per se, when making retirement contributions. Rather, you are moving money from one pocket (cash) to another pocket (appreciating investment vehicle) and getting a deduction for it. <\/p>\n\n\n\n However, you should always consider whether getting a tax deduction now makes more sense or contributing to Roth-featured accounts such as Roth IRAs or Roth 401ks which you don\u2019t give you an immediate tax deduction but generally are tax free when you take qualified retirement distributions.<\/p>\n\n\n\n c. Optimizing Noncash Deductions<\/p>\n\n\n\n Many small businesses with positive tax profits qualify for the \u201cQualified Business Income\u201d (QBI) deduction, which is a 20% offset of the owner\u2019s business income.\u00a0 There is no cash expense to the business \u2013 rather, you simply receive a QBI deduction on the owner\u2019s individual income tax returns if you qualify.\u00a0 However, there are limitations.\u00a0 For example, if the owner\u2019s taxable income is over $364k this year then you may be limited to 50% of the W-2 wages the company pays out this year.\u00a0 As a result, the QBI deduction may be limited.\u00a0 Optimizing noncash deductions is a no-brainer and should be viewed proactively each year.<\/p>\n\n\n\n d. Health Savings Accounts (HSAs)<\/p>\n\n\n\n If you have a high-deductible health plan, consider contributing to an HSA. HSAs offer a triple tax advantage: contributions are tax-deductible, earnings grow tax-free, and withdrawals for qualified medical expenses are tax-free. This can lead to significant tax savings over time. However, you should consider the net after-tax cost of each type of health insurance plan to determine if a high-deductible health plan actually makes sense overall.<\/p>\n\n\n\n Seeking Professional Advice<\/em><\/strong><\/p>\n\n\n\n Avoid falling into the trap of spending excessively to save on taxes. Instead, focus on smart financial decisions and explore legitimate tax-saving avenues that align with the company\u2019s goals.<\/p>\n\n\n\n Tax laws are complex and are continuously changing at an ever faster rate. A knowledgeable tax advisor can help you navigate the tax landscape, identify opportunities, and help you make good decisions that aren\u2019t disruptive to your business and your life.<\/p>\n\n\n\n Contact us today to review your tax planning opportunities.<\/p>\n","protected":false},"excerpt":{"rendered":" When it comes to income taxes, many people assume that saving means spending more money on eligible deductions. While certain expenses can be deductible, tax planning is much more than just blindly spending more money to save in income tax. Smart tax planning involves restructuring your finances, optimizing deductions, and making strategic decisions that can save you significant money without necessarily requiring excessive spending. <\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_genesis_hide_title":false,"_genesis_hide_breadcrumbs":false,"_genesis_hide_singular_image":false,"_genesis_hide_footer_widgets":false,"_genesis_custom_body_class":"","_genesis_custom_post_class":"","_genesis_layout":"","footnotes":""},"categories":[26,24,38,17],"tags":[8,43,22,9,35],"class_list":{"0":"post-37","1":"post","2":"type-post","3":"status-publish","4":"format-standard","6":"category-business-tax","7":"category-long-term-planning","8":"category-retirement","9":"category-tax-planning","10":"tag-small-business","11":"tag-tax-credits","12":"tag-tax-deductions","13":"tag-tax-planning","14":"tag-tax-strategy","15":"entry"},"_links":{"self":[{"href":"https:\/\/www.chrismasseycpa.com\/blog\/wp-json\/wp\/v2\/posts\/37"}],"collection":[{"href":"https:\/\/www.chrismasseycpa.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.chrismasseycpa.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.chrismasseycpa.com\/blog\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.chrismasseycpa.com\/blog\/wp-json\/wp\/v2\/comments?post=37"}],"version-history":[{"count":1,"href":"https:\/\/www.chrismasseycpa.com\/blog\/wp-json\/wp\/v2\/posts\/37\/revisions"}],"predecessor-version":[{"id":38,"href":"https:\/\/www.chrismasseycpa.com\/blog\/wp-json\/wp\/v2\/posts\/37\/revisions\/38"}],"wp:attachment":[{"href":"https:\/\/www.chrismasseycpa.com\/blog\/wp-json\/wp\/v2\/media?parent=37"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.chrismasseycpa.com\/blog\/wp-json\/wp\/v2\/categories?post=37"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.chrismasseycpa.com\/blog\/wp-json\/wp\/v2\/tags?post=37"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}