How to Reduce Taxable Income as a Business Owner

Some of our clients who are business owners often ask how they can reduce taxable income. Click here to listen to a podcast episode going in-depth on this topic. 

401(k) Solution

An important and impactful way to reduce taxable income is to establish retirement plans for your business. As a business owner, you’re probably the most well-paid at your company. So, having a 401k plan, for example, is a great way to put away $22,500 a year, or $30,000 a year if you’re over 50 years, in a pre-tax account. In addition, you can attach profit sharing to it if you’d like. The good part about profit sharing is that after the year is complete, you can elect to take profits from that year and distribute it out to yourself, or to employees. Then you’d be able to deduct that from your prior year’s return. Therefore, having a profit-sharing option in your 401k plan is a great way to lower your tax return. It puts money in your pocket and your employees’ pocket, instead of the Federal Government. You don’t have to choose that option every year, you can decide each year if you want to have a profit-sharing distribution, or not.

Simple IRA Solution

Furthermore, if you don’t want to start off with a 401k plan because of the administrative costs associated with it, you can start with a simple IRA. In a simple IRA, you would do a three percent match for anyone who wants to participate. As a business owner, you’d open up a brokerage account and then most plans are set up where you can just invest on your own.

SEP IRAs Solution

There’s also another option, which is called a SEP IRA. In these, you put money away for yourself and your employees of the 25% of what you’re earning, but you have to do it for everybody. SEPs are more common amongst smaller companies.

Solo 401k

On the other hand, if you’re a solo business owner you have a great opportunity to do a solo 401k plan. You can put away up to $66,000 a year into solo 401k account. If you and your spouse work together you can have two separate plans under the same company, so that’s $66,000 times 2. In conclusion, there are a lot of creative ways to establish those plans and reduce taxable income as a business owner, whether it be a 401k, Simple, SEP, or Solo. 

Have more questions? Contact Us

Casey Smith
President, Wiser Wealth Management

Click here to schedule a consultation with one of our financial planners.

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By Published On: June 23, 2023

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