1. Set up a Company Retirement Plan
Setting up a company retirement plan is a great way for you to set aside funds for the future. You have different tax options in your company retirement plan for Roth or Pre-Tax – depending on your current tax situation and where you expect to be in the future.
My two favorite company retirement plans for companies with employees:
- Simple IRA – easy to administer. Unfortunately, a Simple IRA doesn’t have as high of contribution limits or a lot of flexibility for employee rules as a 401(k).
- 401(k) – Allows for higher contributions and more restrictions on when employees can begin and vesting. With a 401(k) plan there is more compliance work during the year and a bit more expensive.
When starting a 401(k) right now, there are tax credits that can help you with the plan expenses. Retirement plans are often a benefit long-term employees expect you to offer. Having money saved and invested outside of your business helps you prepare for retirement and take pressure of selling the business as the only means for retirement.
2. Understand the right tax election for your company
Your entity type is not the same as your tax status. An LLC can be taxed as a sole proprietor/partnership, C-Corp, or S-Corp.
How you decide to be taxed can dictate tax returns that you file, taxes your business may pay, and self-employment taxes.
I see a lot of hype around being a S-Corp for its tax advantages.
Before jumping right into being taxed as a S-Corp – you should understand the additional work and compliance it takes. Understanding the dollar benefit to you and the additional work should be considered.
Additionally, depending on your company – looking into a C-Corp may make sense for you to qualify for QSBS and potentially avoid capital gains tax if you sell your business.
3. Use your profits and liquidity to reduce ordinary income
To think simply about profits in your business – they are going to be “spent” one of three ways.
Pay taxes then spend on personal lifestyle or reinvest to continue growing your net worth.
As your net worth grows, often your tax bill increases along with it.
As a business owner, you should be thinking strategically about how you invest to continue growing your net worth. We don’t want to “let the tax tail wag the investment dog” – but accomplishing both investment growth and tax reduction is possible for you as a business owner.
Income classified as “ordinary income” is taxed at a higher rate than income classified as a “capital gain income”.
You should be working with your professional team to identify how your current income is taxed, your expected income and its taxation in the future, and then align your investments.
Your investments should avoid unnecessarily adding additional income – and ideally help you create tax breaks for your existing income.
Most times – a tax break that reduces your ordinary income will have the best impact for you. This is attainable for many business owners.
4. Use of real estate for expense recovery and tax savings.
There are some many different directions you can take real estate. I will highlight a few I like.
Often, acquiring to own the property for your business to operate out of can be a great way to turn your monthly rent into equity on your net worth statement.
Depreciating the real estate you own can be a helpful tool to help you reduce your taxes during property ownership. Super-charging your depreciation with cost segregation and bonus depreciation can help you save even more taxes right now.
Having a spouse that is deemed to be a tax status as “real estate professional” will allow you to take the passive losses from the real estate you own and turn them into active losses. The active losses are eligible to offset ordinary income, like W-2 wages. There are a lot of stringent rules to being a “real estate pro” tax status.
A fair warning – the taxes you save from depreciation and bonus depreciation should be saved and not spent!
Unless owned until you die, I call real estate a glorified pre-tax 401k. When you sell the property, your basis in property could be incredibility low compared to the appreciated selling price. This creates a large capital gain (and subsequent capital gain tax) on the sale of the property.
5. Proactively manage your tax bracket
I hear from many business owners, “I had so many deductions this year, that I didn’t have to pay taxes!”
Many people will use their business to create deductions, which can be very helpful. While this certainly is nice in the moment, unfortunately this may not be the ideal goal…
One example of this not being ideal for the business owner is this:
Business deductions, real estate deductions, and retirement plan contributions drop your taxable income to be minimal (or even negative). At the same time a business owner has invested assets that have embedded gains and are yet to be taxed still growing in the background.
A married filing jointly couple does not have to pay capital gains tax on the first $96,950 of taxable income in 2025. The person who has zero taxes paid (thus $0 of taxable income) should potentially be selling some investments and showing the gain to reduce future taxes.
Also, this person may be better off doing a Roth 401(k) contribution and not the pre-tax 401(k) contribution. This would be choosing to pay taxes now – the grow and distribute the money tax free in the future. For business owners, paying taxes in the 10% or 12% federal tax bracket now is no-brainer.
Playing arbitrage with higher tax brackets is achievable too for business owners.
6. Deposit your sinking fund and emergency fund accounts in tax free positions with safety and accessibility.
We’ve all heard the adage “cash is king”. Keeping money on hand in your business is crucial for handling accounts receivable, expansion, and unpredictable downturns.
As your business grows, so does the reserves you keep on hand. Savvy investors work to keep their reserves growing for them beyond traditional savings account interest rates.
Interest income you earn in the business is taxed and that rate depends on the tax status of your company. If you are taxed as an S-Corp or sole proprietor/partnership, the interest is taxed your personal marginal tax rate – which could be as high as 37% for federal taxes.
Ideal characteristics for money in reserve include accessible in a moment, safe, no taxation on interest, and growing for you. Taking stock market risk with reserve funds is not prudent.
Ideally all of these are met. Strategically, this is possible for you.