Most people are looking through the rearview mirror when it comes to taxes. They file their taxes once a year, recording what has already happened. Proactive tax planning is like looking through the windshield, looking ahead to avoid pitfalls that could cost you more in taxes. Sadly, many financial advisors, even those who specialize in working with small business owners, offer little to no guidance when it comes to valuable tax planning strategies for their successfully self-employed clients.

The more successful your business, the more you could benefit from proactive tax planning. Sadly, at the same time, the more successful your business is, the less likely you are to have the time to put into proactive tax planning. We share four areas to explore to see how you can keep more of your hard-earned money each year. There is no reason for your business to leave the IRS a tip, a.k .a. overpaying your taxes each year.

Filing your taxes can be stressful. Financial Planner LA is here to help you avoid giving the IRS a big tip each year. These valuable tax planning strategies can help successful business owner pay fewer taxes and increase their take-home pay. Who doesn’t want to increase their incomes without having to work more hours?

By David Rae Certified Financial Planner™, Accredited Investment Fiduciary™

1. Maximize Tax Deductions For Expenses You Already Incur As A Small Business Owner

Would buying a tractor give you a significant tax deduction? Perhaps, but would spending all that money on a tractor actually help your business? I will assume that is a big NO for most business owners reading this. Would you spend a dollar to get 50 cents back? Even as a business owner with incomes hitting the highest Federal and California income tax brackets, you are likely getting 50 cents (or often much less) back when you take advantage of a tax deduction. So, you want to ensure that you only spend money on things you need to run your business.

There happens to be a bulldozer parked across the street from my house as I type this. My neighbors are remodeling; this expensive equipment is likely essential to someone working in home construction. However, a bulldozer would be of no value to my wealth management firm, regardless of how big a tax deduction it might earn me as a business owner.

Don’t get me wrong, ensuring you benefit from all the tax deductions you are eligible for can add up to substantial tax savings each year. Take steps to ensure you track all your spending for your business so you don’t miss valuable tax deductions. As a business owner, the last thing you likely want to be thinking about is bookkeeping (if you hate it, pay someone to do it for you), but every deduction you miss is like flushing money down the toilet.

When people hire me to guide them through the best tax planning strategies for their small business, they are often looking for “new” tax strategies that they aren’t currently benefitting from. That is all well and great, but it is important first to optimize the tax strategies that you already know about and perhaps aren’t getting the full benefits from yet.

2. Pass-Through Entity Tax Strategy (PTET)

I just sent out our annual reminder to make your pass-through entity tax payment (PTET) to all our California business owners with S-Corporations. Let me tell you, some of the responses from our clients’ tax preparers were quite scary. Responses ranged from the fair question: “Why would you pay an optional tax?” to “What is the PTET tax, and how does it work?” If your tax pro doesn’t even know about the PTET tax strategy, how will that person recommend it to you?

This is one of the most commonly missed tax planning strategies for California business owners. For some reason your CPA and Financial Advisor forget to tell you about it.

Around 32 states have a PTET tax benefit to help get around the $10,000 state and local tax deduction cap from the Trump Tax Plan. This cap is exceptionally onerous for blue states with high incomes and taxes, like California, New York, and New Jersey.

The higher your income and state taxes, the more beneficial the PTET tax election could be. The deadline to make a California PTET election for 2024 is June 17. (If you’ve already missed this deadline plan ahead for your SALT workarounds strategy in 2025). We go more in-depth on this topic in the following post: What You Need To Know About The PTET Tax Election.

3. Optimize Your 401(k) Profit-Sharing Plan

Not only can contributing to a 401(k) plan help you invest for a secure retirement, but it can also help your employees and lower your tax burden as a business owner each year. You can contribute $69,000 ($76,500 for those 50+) pre-tax into a profit-sharing plan. Many business owners do not have 401(k) plans that are optimized to give the business owner the largest possible tax benefits. Talk with your tax planning-focused financial advisor to see how your 401(k) can be improved to allow for larger contributions and the substantial tax savings that come with them.

4. Cash Balance Pension Plan Tax Planning Strategy

The Cash Balance Pension Plan is my favorite tax-planning strategy for my business owner clients, who are in the highest tax brackets. Once you max out your 401(k), the cash balance plan is the next step to allow for the largest retirement plan contributions. Depending on your age and income, you can potentially sock away several hundred thousand dollars each year, pre-tax, into a Cash Balance Plan. You could easily save a million dollars in taxes over the last decade of your career with a Cash Balance Pension Plan. Sadly, many financial advisors don’t have the expertise or even the ability to properly set up a Cash Balance Plan for high-income business owners.

Depending on your are and income you may be able to save several hundred thousand dollars each year (pre-tax) into you personal pension plan.

There is still time to open a Cash Balance Plan to lower your 2023 taxes. Or you can open one to ensure you pay the fewest taxes on your 2024 income.

Some firms won’t even allow their registered representatives even recommend a Defined Benefit Plan or Cash Balance plan to their clients. If you ask me, ignoring this valuable tax planning strategy is a breach of their fiduciary duty. Why would a business want to know about a tax planning strategy that both helps them reach financial freedom faster but also allows them to potentially pay hundreds of thousands – if not millions of dollars- in fewer taxes over the next decade?

We go more in-depth on this topic here: Which Business Owner Needs a Cash Balance Plan?

Your old-school financial advisor may be doing a great job with your investments. However, if they aren’t helping you with tax planning as well, you are likely leaving a large amount of money on the table. Few financial advisors have the expertise necessary to help you set up and optimize your profit-sharing and cash balance plan to pay the least amount of taxes each year. If your advisor is unable or unwilling to help you with tax planning, it may be time to find someone who can and will help you avoid leaving a huge tip for the IRS each year.

If you want to ensure you are utilizing all the best tax planning strategies for your business, schedule an intro call with us.

DAVID RAE, CFP^®, AIF^® is a Los Angeles Financial Planner who specializes in tax planning with DRM Wealth Management. He has been helping friends of the LGBT community reach their financial goals for over two decades. Nightline has called him a “Tax Wizard in an Expensive Suit” He is a regular contributor to Forbes.com,  the Advocate Magazine and Huffington Post, as well as the author of the Financial Planner Los Angeles Blog. Follow him on Facebook or via his website www.davidraefp.com

How The Cash Balance Pension Helps You Reduce Your Taxes And Boost Retirement Security