Year-end tax planning can pose additional complexities — but also opportunities — for small business owners who are managing both their personal finances as well as their business financials.
Here are three planning ideas that may help entrepreneurs manage their business taxes and liabilities.
1. How to transform an operating loss into tax-free income. Small-business owners who will record a net operating loss (NOL) this year may be able to use it to their advantage. NOLs may be carried forward to offset ordinary income on future tax returns. This may be useful for Roth IRA conversions — clients carrying forward large NOLs can use those losses to offset the additional income from a Roth conversion. Also, unlike net capital losses, where taxpayers are limited to using only $3,000 annually to offset any ordinary income, there is no limit on how much of an NOL can be used to offset ordinary income. The rules on calculating and utilizing NOLs are complicated, so it is critical for clients to consult with a qualified tax professional. For more detail on how to use a Roth strategy, read Putnam’s investor education article, “Advanced tax strategies using a Roth IRA conversion.”
2. Is your asset protection plan adequate? A year-end review of asset protection strategies can help investors determine whether insurance coverage is sufficient and alert them to update beneficiary information. Putnam’s “Asset Protection Checklist” helps investors consider many asset protection strategies for personal assets as well as for sole proprietors and small business owners.
Individuals do not need to own a business to be concerned about asset protection. Self-employed individuals, especially physicians and other health service providers, may want to consider protecting their assets against potential litigation. To learn more about ways to protect what you own, read, “Asset Protection: Basic principles and strategies for safeguarding your wealth.”
3.There is still time to set up a retirement plan and fund a SEP IRA. It can be challenging to make time for everything while running a business, to the point that owners may put off establishing a retirement savings plan. In fact, a TD Ameritrade survey found that only 10% of self-employed individuals regularly set aside a portion of their earnings for retirement and that 28% do not save for retirement at all.
It’s important for small businesses to have a plan, and a Simplified Employee Pension (SEP) IRA can make it easy. SEP IRAs offer several tax benefits. Contributions are tax deductible, and discretionary and the plans have high contribution limits that can help workers maximize their savings. If you’re competing for talent in the workforce, it’s important to note that a retirement benefit may also help attract and retain employees.