The 2015 tax season is here. Tax planning is a critical part of a small business owner's financial plan. The majority of small business owners ignore tax planning; yet good tax advice is a very valuable for a successful business. There are many tax planning strategies available to small business owners. Below are a just a few:
- Lowering your tax rate to reduce the amount of taxable income
- Taking advantage of available tax credits
- Controlling the effects of the AMT (Alternative Minimum Tax)
I encourage business owners to work with a competent accountant or CPA on at least a quarterly basis to take full advantage of all the tax provisions that are available. As a CFP® (Certified Financial Planner) I work from a team approach and refer clients to a local accountant that I know will provide excellent tax planning advice to small business owners.
I work with a lot of small business owners and their #1 goal is to have enough money saved up in order to retire. A great retirement planning vehicle for small business owners is a Simplified Employee Pension Retirement Arrangement (SEP IRA). Business owners like SEP IRAs because it provides tax and retirement benefits for themselves as owners and their employees. A SEP IRA allows each owner to make contributions that cannot exceed the lesser of:
- 25% of compensation (based only on the first 265,000 of compensation for 2015 and 2016), or
- $53,000 (for 2015 & 2016)
Contributions are made directly to an IRA set-up for each owner's/employee's SEP IRA. The maximum deductible amount for SEP IRA contributions is determined by the IRS and can significantly reduce the taxable income for the owners of the business.
Employees can be excluded from the SEP IRA until they have achieved the following requirements:
- Has reached the age of 21
- Has worked for the employer in at least 3 of the last 5 years
- Received at least600 in compensation from the employer during the year (for 2015 and 2016)
The SEP IRA is a great option as a retirement savings vehicle for small business owners. But, do small business owners have retirement saving options outside of their company sponsored plan?
Yes, small business owners do have options. One option is the Roth IRA. A Roth IRA is a fantastic vehicle to prepare for retirement and can be established in addition to a SEP IRA. The maximum contribution amount allowed into a Roth IRA is $5,500. Initial contributions are not tax deductible however distributions after the age of 59 ½ are tax free. As a financial planner, I am a huge fan of creating a tax free income environment during retirement and a Roth IRA can accomplish this strategy.
However, from my experience small business owners are high income earners thus limiting their ability to contribute into a Roth IRA. Thus, a Traditional IRA is a great alternative. With a Traditional IRA initial contributions may be deductible, but distributions after the age of 59 ½ are fully taxable. The deductibility may be reduced or eliminated because of the establishment of the SEP IRA.
If the business owner is not able to deduct their Traditional IRA contributions (and their income exceeds Roth IRA contribution limits), I recommend a strategy called the "Backdoor Roth IRA". Since there is not an income limit to convert assets from a Traditional IRA to a Roth IRA this is a great strategy to generate tax free income for retirement for high income earners.
The following tax planning strategies sound great, but if I cannot provide my clients with the necessary investment growth within their retirement planning vehicles then the best tax planning strategies are useless.
That is why I submit to you that there is a better way to manage your investment portfolio in spite of the recent stock market volatility of 2016. In my previous article, There is a Better Way! - Why No One Talks About the Stock Market the Right Way discusses in more detail my approach to investment management through tactical portfolio management.
To learn more about Blake Fambrough and his approach to financial planning view his Paladin Registry profile.
Article originally posted at Paladin Registry.com
About the Author: Blake Fambrough, Financial Advisor with Dubots Capital Management attended Texas Tech University and received a B.B.A. in Finance and a M.S. in Personal Financial Planning. In addition, Blake holds the Certified Financial Planner® designation. He has been working in the financial services industry since 2004. He is a member of the Lake Elsinore Rotary Club. Blake with his wife Christina and their daughter live in the Lake Elsinore area and enjoy volunteering their time to their local church. Follow Blake on Twitter @Fambro1