Here, we highlight a few strategies we recommend to our business owner clients. While these strategies may not be new, we believe it’s always beneficial to revisit them.
It may seem intuitive, but you’d be surprised how many people neglect to contribute the maximum allowable amount into their retirement accounts each year. Contributing to your retirement accounts decreases your adjusted gross income. What’s more, the contributions are tax deferred, meaning you will not pay any taxes on those contributions until the money in the account is withdrawn. Often, by the time withdrawals are made, you are in a lower tax bracket, which means your tax impact could be lower.
One strategy we frequently recommend to business owners who make more than $250,000 a year and have free cash flow of $100,000 or more, is to add a cash balance plan. The key factors that determine the portion an owner or employee is allocated from the contribution are their age and wage. The higher their age and wage, the larger their portion of the company contribution they will receive relative to younger, less paid employees.
Cash balance plans resemble traditional defined benefit plans with a 401(k) twist. As with a traditional pension plan, the participants are promised a certain benefit at retirement. A cash balance plan promises an account balance when you retire at 65, rather than in the form of a monthly annuity payment, like a typical, traditional defined benefit plan.
Even though you can contribute at any age, a cash balance plan can be particularly beneficial to older participants. Contribution limits vary depending on age. But to illustrate, in 2024, someone who is age 50 can contribute approximately $195,000 annually in pretax money to a cash balance plan. For that same person, a 401(k) with a profit-sharing feature has total employer and employee contributions limits of $76,500. As you can see, with a cash balance plan you can boost your retirement savings dramatically while both enjoying a write off and designing a plan to reach the most important key employees, including you, the owner. These limits will increase in 2025, Selecting the right type of retirement plan for you and your business should be done under the guidance of professionals who are well versed in retirement planning, taxes, and tax-efficient portfolio designs.
If you have old or unused office equipment or furniture that’s taking up space (and perhaps even incurring storage fees), you can often get a tax credit by donating it to a 501(c)(3) charitable organization. Donating items not only helps charitable organizations, but also keeps still-usable items out of landfills. There are rules regarding what and how much can be donated for a tax credit. For example, in order for obsolete inventory to qualify for a tax credit, it must still have some value and the charitable organization must have use for it. If you do make a donation, be sure to get a receipt to submit at tax time that includes the value of the donation, the date the donation was received, and what it will be used for.
Another tax saving strategy to consider is clearing out non-moving inventory. If you own a retail store and have seasonal merchandise left over at the end of the year, disposing of that inventory – through a deeply discounted sale perhaps – will allow you to take a loss on your taxes, potentially resulting in savings.
There can be many benefits to starting a new year with a clean balance sheet, including tax advantages. When you prepare taxes using a clean balance sheet, you’ll have the most up-to-date numbers, which may help you to avoid unwanted attention from the IRS.
If you are on a cash basis for tax purposes, paying any outstanding bills before year-end will get them off your books, as well as possibly helping to reduce your tax burden. Also, take time to review your account receivables. Determine whether it’s more advantageous to collect money during the current year or push the bills forward into the next tax year. Keep in mind, some payers may be cleaning up their own balance sheets and may not want you to defer their payment to you.
When cleaning up your balance sheet you should also consider whether you want to continue working with certain clients who either drain your time or simply don’t appreciate your value (as evidenced by paying late). Think of how you could use your freed-up time and positive energy working with new clients who appreciate what you do for them.
At Modera, we help our clients stay on top of their financial issues and concerns throughout the year, so that when tax time does roll around, there are little to no surprises. As seasoned tax professionals, we offer careful and considerate counsel, and work closely with your other trusted advisors, including CPAs, tax attorneys, and family members to provide complete care for every aspect of your financial life. Your peace of mind is our ultimate goal, knowing we’re always looking out for your best interests. Whether you are a current Modera client or a business considering our services, please reach out to us to see how we can help enhance your business today.
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