5 Essential Business Tax Planning Tips

Tax planning for your business shouldn’t just be a seasonal task. While the 2024 tax filing season has just begun, it’s never too early to start preparing for 2025 and beyond. Smart tax planning is a year-round activity that can save you time, money, and stress. To help kickstart your planning, here are five essential tips to set your business up for success. 

1. Thinking About Selling Your Business? Plan Ahead 

If you’re considering selling your closely held partnership or S-Corporation, it’s crucial to prepare early. Selling a business involves complex tax implications at every stage of the process—not just when reporting capital gains.

Here’s how to set yourself up for a tax-efficient sale: 

• Engage advisors early: Work with trusted legal and accounting professionals throughout the sales process.
• Understand the tax impact: Be aware of the tax liabilities tied to the sale, such as capital gains and potential deductions. 

2. Buying a Business? Don’t Overlook These Tax Implications 

Purchasing a business is an exciting opportunity, but it also comes with unique tax considerations. When you’re on the buyer side, your tax priorities are different, and planning ahead is essential for a smooth transaction. 

Tips to maximize your business purchase: 

• Assess the tax consequences: How the transaction is structured can significantly impact your future tax obligations.
• Work with a team: Enlist the help of legal and financial professionals to ensure you’re making tax-savvy decisions. 

3. Use Voluntary Disclosure Agreements (VDAs) to Manage State and Local Taxes

Is your business behind on filing and paying state income taxes? If so, a Voluntary Disclosure Agreement (VDA) might be your ticket to compliance. Without proactive steps, you could face audits with no statute of limitations and significant penalties. 

Why consider a VDA? 

• Limits the lookback window: Retroactive tax liabilities are generally capped at 3-5 years instead of an unlimited period.
• Reduces penalties: VDAs often include abatements for penalties and interest, resulting in meaningful savings.
• Improves compliance: Catching up on past filings ensures you can move forward confidently with current and future taxes. 

If your business has unfiled taxes, explore the VDA option before being audited by the state. It’s a proactive step toward resolving outstanding liabilities. 

4. Maximize the 20% Qualified Business Income (QBI) Deduction

The 20% QBI deduction, introduced by the 2017 Tax Cuts and Jobs Act (TCJA), allows eligible business owners of pass-through entities to reduce their taxable income by up to 20%. However, this deduction comes with limitations, especially for high-income earners. 

What you need to know: 

• Monitor your income: High-income taxpayers may see the deduction phase out or disappear entirely once income exceeds certain limits.
• Plan with your tax advisor: Work with a professional to analyze your income sources and find strategies to optimize your QBI deduction. 

Taking proactive steps now ensures you maximize this valuable tax benefit and minimize surprises when filing your return. 

5. Mitigate the Effects of Section 163(j) Interest Limitations

The TCJA also introduced stricter limits on deducting business-related interest expenses under Section 163(j). If your interest expense deduction is capped, there are strategies to reduce its tax impact. 

One potential option is Section 266, which allows you to capitalize certain costs into the adjusted basis of property. This strategy could defer interest expense limits and provide long-term tax savings. 

Key points to consider:

• Eligibility is key: The Section 266 election is only available in specific situations, so a detailed annual analysis is required.
• Plan ahead: Work with your tax advisor to evaluate whether this strategy is suitable for your business. 

Understanding your options can help you control the effects of interest deduction limits and lower your overall tax liability. 

Next Step

Tax planning is a dynamic process that pays off when approached strategically. Whether you’re buying or selling a business, addressing old tax liabilities, or implementing tax-saving strategies, it’s vital to consult with experienced advisors who can guide you every step of the way. 

For personalized tax planning advice or questions about any of the tips outlined above, contact your Herbein tax advisor. With the right strategy, you can position your business for financial success in the years ahead. 

Article Contributed by Sarah R. Knox