Founders are faced with unique challenges and opportunities in regards to taxes, particularly when it comes to equity, stock options and capital gains. Poor tax strategies could reduce your profits or increase your liabilities if you are not careful.
To better understand IRS rules and ensure compliance while optimizing your tax strategies, review our IRS guides & tax filing resources.
Tax efficiency is a key factor in structuring your business
As a business owner, you will need to make a decision about how your company is structured. This decision should be reviewed regularly as your business grows. Your business structure, whether you run a C-Corp or S-Corp or LLC, has important tax implications.
As a C-Corp founder, you may be subject to double taxation – once on the profits of your company and then again when dividends are distributed to shareholders. A S-Corp, on the other hand, allows both profits and losses from your company to be passed through to you, allowing you to avoid double taxation. However, careful planning is required to determine how you will pay yourself.
Tax planning is essential when deciding on or changing your structure, especially if you are looking to issue stock options, gain investors or plan an exit. A tax advisor can assist you in determining if reorganizing your business could lower your tax liability and align better with your long-term objectives.
Explore our complete tax planning guide to learn how to reduce taxes, optimize your business structure, and plan smarter as you scale.
Tax liabilities can be reduced by maximizing deductions and credits
Founders have access to a variety of tax credits and deductions that can reduce their taxable income. You can take advantage of some of the most important tax deductions.
- Start-up costs: To reduce the initial financial burden and to deduct expenses like legal fees, marketing expenses, and initial business expenditures.
- Home Office Deduction: If you work at home, you can deduct some of your expenses, including rent, mortgage, utilities and other costs.
- Research & Development Tax Credit (R&D): If your business is innovating new products or processes, you can reduce your tax liability by a significant amount.
For detailed guidance on how to maximize deductions while staying compliant, see our comprehensive IRS tax filing and planning guide.
You must track these deductions throughout the year and work with an accountant or tax advisor to maximize your savings while complying with tax laws.
Leveraging deferred compensation plans
Your personal wealth is probably closely linked to the success of your business. Deferred compensation is a powerful tax tool. Deferred compensation plans allow you to defer a portion of income or bonuses for a later date.
Deferring compensation allows you to reduce your current taxable income while saving money for the future. These plans can be beneficial for companies that are growing rapidly or preparing to exit. A financial advisor can help you create a deferred pay plan that is tailored to the growth trajectory of your company and its long-term financial objectives.
Capital Gains Tax Management
Capital gains tax will likely apply to the profits you make when you sell your business or equity. With the right planning, your tax liability can be minimized. We can help founders sell their business through installment sales. This method does not allow the owner to receive the full purchase price immediately but it allows them to spread out their tax liabilities over several years. In some cases, this has helped to avoid the higher tax brackets during the year of sale.
The Qualified small business stock (QSBS) exemption is a significant tax benefit for entrepreneurs. If your company qualifies you can exclude capital gains up to $10 million from taxation. You must hold your shares for at least 5 years to qualify for this exemption.
Also, it’s important to differentiate between short-term gains and long-term gains. If you hold your stock for over a year, the tax rate on gains can be significantly reduced.
Tax-deferred retirement accounts: Planning for your retirement
You can easily focus all your efforts on growing your business, and forget about retirement planning. Setting up tax-deferred accounts such as a Solo 401 (k), SEP IRA, Roth IRA or Deferred Compensation Plan allows you to accumulate wealth outside of your business.
Contributions to tax deferred accounts reduce your taxable income for the year in which you make the contribution, and the funds continue to grow tax free until you withdraw the money during retirement. These accounts are a great way to reduce your tax burden while growing your wealth.
Financial advisors can help you decide how much to contribute each year and which accounts will offer you the best tax benefits, based on your financial situation. You can reduce your income by deferring it to a retirement account such as a SEP IRA or a Self Employed 401(k). This will allow you to reach certain income thresholds in the year that a sale occurs. You can also defer a significant amount of income into a Deferred Compensation Plan. This could open up many planning options depending on the structure of your business.
You can maximize your benefits by working with a team of financial planners who will also help you weigh the future tax liabilities associated with large deferrals.
Dive into our comprehensive tax planning guide to create a long-term strategy for minimizing taxes, maximizing wealth, and planning a tax-efficient exit.
Tax-efficient exit strategies
When you are ready to sell your company or step away from the day-to-day operation of your business, tax planning is even more important. Stock sales are usually more tax-efficient than asset sales, as they are often subject to lower capital gains tax rates than ordinary income taxes.
If your business owns real estate, you can also take advantage of a 1031 exchange, which allows you to defer capital gains taxes by reinvesting the proceeds from the sale into a new property.
Experts can help you structure your sale in a way that minimizes your tax liability, whether it’s through stock sales or deferred compensation. We can help clients who own C-Corporations to minimize the capital gain by selling their business to the employees. They have to set up an Employee Stock Ownership Plan (ESOP). The sale proceeds could be rolled into an investment plan in order to defer capital gain and they also get the benefit of not needing to sell the business to outside buyers.
Learn more about IRS compliance and reporting rules by exploring our full IRS guides & tax filing resources.
Estate and gift tax planning for founders
Transferring your business ownership or giving shares to your family can reduce your taxable estate size and ensure your wealth is transferred efficiently.
You can reduce the future tax burden of your estate by using trusts, giving shares over time and setting up a family partnership. Planning early with a professional tax advisor will ensure that you maximize the available exemptions, and transfer wealth as tax-efficiently as possible.
Tax planning is more than just reducing your liabilities. It’s also about developing a strategy to maximize wealth as you grow, scale, or exit your business. Expert guidance is crucial for navigating through these complexities and managing your capital gains.
For a complete resource on IRS rules, filing requirements, and tax planning strategies, review our IRS guides & tax filing resources.
Working with a tax professional or financial advisor like Parr & Ibarra CPA can help you leverage every available strategy to minimize taxes and protect your wealth. This will allow you to focus on what you do best: building your business.
