Tax Planning for Business Owners: Five Things to Remember

In recognition of National Small Business Week, which took place earlier this month, Truepoint is sharing ideas about the unique wealth management challenges and opportunities faced by business owners.

Part 1: CEO Michael Chasnoff on maximizing the value of a business.
Part 3: Wealth Advisor John Evans and Financial Planning Specialist Eric Ross on selling the business.


In working with many successful business owners, I’ve come to see how the best-managed companies never lose sight of long-term goals, like profitability and expanding their customer base, even as they carefully manage many “moving parts” on a daily basis. Such a balance between the strategic big picture and operational details also applies to effective tax planning.

Here are five ideas business owners can – and should – embrace to help them manage their tax exposure.

1. Take the holistic view

Because business owners often have much of their personal wealth closely tied into the business, personal tax needs will sometimes cloud the view when evaluating a business decision. While important to the big picture, personal tax implications shouldn’t be the only driver in the process.

Additionally, depending upon the business structure, a single business decision can greatly impact the combined individual and business tax liabilities. It is therefore important that business owners look at financial, tax and retirement planning with the broadest possible perspective. In our experience, an integrated team of specialists – where tax professionals collaborate directly with financial planners, estate planners, attorneys and other dedicated experts helps business owners strike the right balance.

2. Timing can boost value

Business owners should definitely take the long view when it comes to taxes and project their liabilities across multi-year time horizons. For instance, you may want to time distributions or plan for compensation events before or after January 1 to manage the tax impact. Similarly, it may make sense to accelerate or defer deductions based on projected income and tax rates.

These “bucketing” income strategies require ongoing tax planning, not just in the run-up to April 15. The key point to remember is that a single year’s tax return is a snapshot of what happened in the past, while strategic tax planning is a forward-looking and proactive exercise, designed to minimize tax burdens and maximize net income for years to come.

3. Retirement and tax planning go hand in hand

Business owners have many options to consider in setting up their own personal retirement plans, many of which provide significant tax advantages. For instance, defined benefit plans may be very effective for saving and protecting a lot of money in a short time period, whereas a solo 401(k) plan may be highly useful for a sole proprietor. Again, a little proactive planning can help ensure you understand all the choices and thus tailor your plan to your unique circumstances as well as those of the business.

4. Monitor and understand your expenses

As Michael Chasnoff highlighted in the first of our series, comingling personal and business expenses may seem attractive in the short term, but may make it harder to understand company performance. From a tax perspective, it also helps to understand which expenses are allowable and to recognize those that provide the best bang for your buck, especially in areas often scrutinized by the authorities, such as meal and entertainment expenses. For instance, some meals are 100% deductible, some 50% and others not at all. Structuring company policies within the framework of allowable deductions can assist the company in maximizing the value of deductions.

5. Embrace the changing landscape

Just about every year, there are meaningful changes to the tax code at both the federal and state levels. The good news is that they don’t always increase your taxes. In fact, recent changes in Ohio tax law for 2015, 2016 and beyond offer considerable benefits to business owners and are benefitting many clients significantly.

We encourage our business owner clients to also look beyond the current landscape and stay abreast of potential regulatory changes. For example, committees in both houses of Congress are currently evaluating various tax code changes aimed at increasing the competitiveness of businesses here at home and abroad. Being aware of and ready for changes in the tax code may provide a competitive advantage once the legislation is passed.

A proactive and integrated approach is just as critical to effective tax management as it is to overall business management. Accurate and timely information and regular communication with tax experts and other advisors can help promote better decision making. Such a holistic approach is especially important for business owners, given the unique interdependency of their personal tax situation with that of their business. This is why we encourage business owners to always keep their eyes on the tactical details even as they strive to achieve their big-picture and long-term strategic goals.

Truepoint Wealth Counsel is a fee-only Registered Investment Adviser. Registration as an adviser does not connote a specific level of skill or training. More detail, including forms ADV Part 2A & 2B filed with the SEC, can be found at TruepointWealth.com. Neither the information, nor any opinion expressed, is to be construed as personalized investment, tax or legal advice. The accuracy and completeness of information presented from third-party sources cannot be guaranteed.

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