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Strategic entrepreneurs recognize that the new year is prime time to gain a competitive edge. One of the best ways to do this is to take a fresh approach to your tax planning.
Instead of simply closing out your books, carve out time for some high-value strategic work. You’ll come away with a clear vision for your financial future, less stress and, most likely, more money in your pocket.
Here are four steps to guide the process.
1. Figure out where you stand
First things first: If you haven’t already met with your tax advisor to estimate your taxable income and tax liability for this year and next, schedule that meeting as soon as possible. Knowing these numbers gives you a starting point to plan your next moves.
An April tax bill should never be a surprise. If you’ve experienced this, it is a sign that you’re taking a reactive approach to taxes. As an entrepreneur, you should be as proactive as possible. Getting control of your financial destiny starts with knowing your numbers.
2. Identify the right quick wins
Once you know your estimated tax liability, ask yourself: What can I do now to reduce the taxes due next April? One of the first options people jump to is postponing income to the following year. This should not be your first move. Instead, make sure that you and your tax advisor are looking at the whole picture.
Look for things you can do right now that will give you a permanent — rather than deferred — tax reduction. Here are several moves to consider.
- Maximize deductions. Many entrepreneurs don’t take all the deductions for which they qualify, basically donating money to the government. Review all of your expenses, both personal and business, and see if you are leaving money on the table. Two deductions I often see entrepreneurs miss are the home office deduction and business expenses paid from a personal account.
- Give to charity. While it makes no sense to donate to the government by skipping deductions, there are plenty of nonprofit organizations that will do great work with your gifts. The government encourages this kind of giving by allowing taxpayers who itemize their deductions to deduct donations to qualified charities up to a certain percentage of their adjusted gross income. Plus, donations don’t have to be made in cash. You can donate stock, property and even digital currency. When you donate appreciated assets, such as Bitcoin, you can get a charitable deduction for the asset’s fair market value, and you don’t have to recognize the capital gain.
- Use tax credits. In many ways, tax credits are even better than tax deductions because they reduce the taxes you owe dollar for dollar. Many tax credits will require a bit of planning, so you may find more opportunities to reduce your taxes in future years. However, it is still worth exploring as a potential quick win.
3. Get a jump start on 2025 and beyond
With those quick wins secure, it’s time to think ahead. What can you set in motion now to accelerate growth in your business while also permanently reducing your tax burden?
Look for actions that will create lasting benefits and organize them into a roadmap to guide you over the next three to five years. Here are some actions to consider.
- Set up entities strategically. Entrepreneurs unlock significant tax benefits and earning potential compared to employees when they create business entities — especially if they choose the right tax structure. If you move fast, you may be able to create a new LLC, corporation or partnership before the end of the year. If not, start the process now and have the results benefit you as soon as possible. For the best results, coordinate with your attorney, CPA and other advisors.
- Make new investments. The government pays entrepreneurs to make certain kinds of investments by offering tax incentives, often in the form of tax credits or deductions. As you think about your next moves in business, consider where you can invest your money to get both a great return and a great tax benefit.
- Look for lower tax brackets. If you are an entrepreneur with children, they can provide valuable support to your business and give you access to their lower tax bracket. For example, if your child works in your business, they can earn up to the amount of the standard deduction and not have to file a tax return. The child’s salary is a deductible expense for the business and has $0 tax. Sit down with your tax advisor and see what your kids could do within your business and how you can use that money for certain expenses.
4. Prepare for change
With many elements of the 2017 Tax Cuts & Jobs Act set to expire at the end of 2025 and a new administration poised for action, we’re likely to see some significant shifts in tax law. But remember: No matter who is in the White House or Congress, the tax law is a series of incentives available to anyone who chooses to utilize them. As you create your tax strategy, look for ways to stay nimble. That way, you can adjust as new tax policies come into play.
There are things you must look at now, especially around estate planning. Unless there is a change in the tax law, the estate tax exemption will drop back down at the end of 2025 to its 2017 base level. Review your will, trusts, insurance, beneficiary designations and powers of attorney, and consider whether you want to exercise your gift tax exemption this year. For 2024, you can gift up to $18,000 per individual (or $36,000 per married couple) without filing a gift tax return.
Use this time at the beginning of the new year wisely. By taking these simple steps now, you will start 2025 off ahead of the pack.
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