Running a successful business involves more than just making sales and managing day-to-day operations. One of the key players in your business’s growth and financial stability is your Certified Public Accountant (CPA) at our accounting firm. They don’t just help with tax returns; they can be instrumental in structuring your business, implementing tax-saving strategies, and providing regular financial guidance. To make the most of their expertise, here are three critical questions you should ask them:
1. Is My Business Properly Structured?
Your business’s structure can significantly impact your taxes, ability to attract investment, and your long-term goals. While many entrepreneurs start as sole proprietors or general partnerships, it’s essential to evaluate if your current structure aligns with your business objectives. There are many things to consider, and this is not an exercise you perform without expert guidance. Here are just a few considerations:
- Aligning Business Goals with Structure: Suppose your ultimate objective is to cultivate and then sell your enterprise. A CPA can illuminate whether a structure, like a C corporation, might be beneficial. For instance, the Qualified Small Business Stock (QSBS) strategy. Did you know, for the right business structure you can eventually sell that business at potentially $0 capital gains tax? A lot of companies do just that under QSBS. Or, did you know it can be difficult and expensive to get real estate out of certain structures? There is no one-size fits all. Every set of goals has the right structure- you just need the right guidance from a capable CPA!
- Optimizing Tax Benefits: Many businesses might not fully benefit from tax savings due to their current structures. Have you considered making an S-election? Doing so might mean vast savings on payroll taxes, which can be about 15% of wages. In specific states, structures like S-Corporations or partnerships might benefit from the Pass-Through Entity Tax credit (PTET). Moreover, some Schedule C businesses might find it advantageous to form a partnership, moving from a structure that doesn’t allow for PTET benefits, to a structure that does! And, while not unique to any particular structure, are you fully utilizing the Qualified Business Income (QBI) deduction (20% automatic deduction on business income)? Does your structure allow for it? Even if you are taking advantage of it, certain circumstances might limit it, requiring proper planning to lift some of these limitations. Consulting with a CPA will clarify if your business structure is optimized for all these potential tax benefits.
In essence, while many start their entrepreneurial voyage as a sole proprietor or in a general partnership, periodically reassessing and potentially reshaping your business structure can be impactful. Some of the most advantageous structures need to be considered and planned even years in advance (QSBS has a 5-year holding period!). Given the intricate nature of these choices, expert guidance isn’t just a luxury—it’s essential.
2. Are There Any Tax Strategies We Haven’t Talked About?
Tax planning goes beyond simply getting making an early appointment with your CPA. The best tax planning opportunities are planned for months in advance while there is still time left in the year to implement them. If you are with the right CPA, you are hopefully hearing about your tax opportunities without having to ask about them. BUT, CPAs are currently in high demand with fewer and fewer coming into the industry and some CPAs are simply stretched to thin. Take ownership of your tax situation and set a tax-planning meeting with your CPA you ask about and explore various tax-saving strategies that you might not have considered. Many CPAs (like PlushStone) offer tax planning services as a paid service, and this is a service that almost always pays for itself!
Here are a few strategies to discuss, but don’t let these examples limit the conversation:
- R&D Tax Credit: If your business is involved in research and development activities, you may be eligible for the Research and Development (R&D) tax credit, which can lead to significant tax savings. Don’t overlook (or over-think) this credit! For many businesses, the knee-jerk interpretation of when this credit might apply is for tech companies or other businesses developing a new product to take to market. Those are the obvious examples. But other examples include enhancing an existing product, enhancing internal-use technology, building internal-use technology, innovating new business processes, or researching environmentally friendly processes or materials.
If your company is involved in any activity that is technological in nature or innovative, involves a process of experimentation, and has some element of technological uncertainty (meaning there’s an unknown aspect regarding the capability, method, or the best way to achieve a desired outcome), then there could be an R&D tax credit opportunity on your hands!
- Minimum Reasonable Wages: For S-corporation owners, setting minimum reasonable wages can optimize the balance between salary and distributions, potentially reducing overall payroll taxes. Payroll taxes amount to over 15% on gross wages! In other words, as a business owner if you pay yourself a W-2 wage of $100, at least $15 goes to Uncle Same leaving you with $85. Then that same $100 is taxed at your personal income tax rates and you only get to deduct 50% of that $15 payroll tax, while the other 50% is effectively taxed twice!
The beauty of an S-Corporation is that you can set your W-2 wages lower than your total business profit. This allows you to protect any business profits not designated as wages from the 15% payroll tax. As an example, if your business generates $150,000 in total profit and you pay yourself $80,000 in the form of W-2 wages, the remaining $70,000 in business profit is shielded from that 15% payroll tax (a $10,500 savings!).
The tricky part is the IRS requires that you pay yourself an undefined minimum “reasonable compensation”, and THAT is where your CPA comes in. Consult with your CPA about minimizing your wages while maintaining that reasonable compensation balance.
- Retirement Plans: Discussing retirement plan options can help you save for the future while enjoying tax advantages in the present. This is likely your single biggest tax savings opportunity as a business owner. There are many things to consider. Do you have employees? Then you might want a safe-harbor plan. Do you have a lot of income to protect? Then you might consider a profit-share (to yourself and your employees). No employees? Great- these tax savings are still available to you, but now there is less cost to consider.
See our blog – Investing in Retirement Plans: A Long Term Tax Saving Strategy, where we explore this topic in detail.
- Employing Business Owner’s Children: Hiring your children can have tax benefits while teaching them valuable skills and instilling a strong work ethic. Business owners have a unique advantage in this situation. Many of us want to teach our children the value of hard work and contributing to a team, and if we own a business we can do exactly that- WHILE simultaneously shifting our highly taxed income to our children’s untaxed (or low-taxed) income.
For example, if you have office tasks or field work that needs to be handled and your 6-year old is capable of handling them (document shredding, sweeping, scanning, etc), put them on payroll land pay them for their work! Assuming you pay your child the current minimum wage of $15.50/hour (as of September 2023, the date of this publication), and your child can work 2 hours per day after school (520 hours per year), that is $8,060 per year you can shift to your child. With a standard deduction of $13,850 your child pays no taxes on income YOU would have paid around 30%.
Proactive tax planning can be the difference between maximizing savings and missing out on valuable opportunities. Engaging in a comprehensive dialogue with your CPA about strategies such as the R&D Tax Credit, optimizing wage structures, retirement planning, and the benefits of employing your children can unearth a goldmine of savings. Remember, it’s not just about fulfilling tax obligations; it’s about strategizing and optimizing every facet of your financial picture to ensure you’re benefiting from all available avenues.
3. Could My Business Benefit from Regular, Recurring Accounting and Financial Guidance?
Consistent financial guidance can be pivotal for businesses to optimize their operations and make informed decisions. THIS is the PlushStone team’s passion and highest value-add service for our clients. CPAs who serve a number of different clients across different industries have valuable insight and experience to share. When asking your CPA if your business can benefit from expert financial guidance, consult with them on the below considerations and how their services can play a role:
- Understanding Accounting Methods: It’s essential to know the difference between various accounting methods and which is best suited for your business.
- Bank Balance Accounting: An informal method where businesses operate based on their bank balance. While it’s straightforward, it can obscure the true financial health of a business and blindly lead a company toward disaster.
- Cash Basis Accounting: Recognizes revenue and expenses based on cash transactions. It’s simpler but might not reflect the actual profitability, may lead to cash flow surprises, and can limit financial planning.
- Accrual Basis Accounting: Aligns revenue and expenses to when they are earned or incurred, providing a more comprehensive view of a company’s finances. It’s a clearer representation of your business’s real profitability and lends itself to a more clear picture of upcoming cash collections and commitments.
- Professionally Designed Financial Statements: Well-prepared financial statements not only fulfill regulatory requirements but also provide valuable insights into your business’s performance over time, areas for improvement, and can be a valuable tool in various business decision making processes.
- Fractional CFO Services: This is the pinnacle of ongoing busuiness advisory and guidance! Many businesses might not require or cannot afford a full-time CFO, but businesses regularly consulting with a high-level financial expert go farther faster. A fractional CFO provides strategic financial guidance, forecasting, budgeting, and analytical insight on a part-time basis. This allows businesses to get the financial leadership they need without the full salary commitment, ensuring that financial strategies align with business goals and fostering sustainable growth.
In conclusion, our accounting firm offers more than tax preparation; we are strategic partners in your business’s success. By asking these three crucial questions, you can harness our CPA’s expertise to optimize your business structure, implement tax-saving strategies, and receive ongoing financial guidance. This proactive approach can lead to increased profitability, reduced tax liabilities, and long-term financial stability for your business.