Tax strategies that help small businesses boost their value
January 30, 2024 ⋅ 4 min read
Every small business owner wants to save on taxes and boost their business’s value. But these two goals can be conflicting. The right mix of tax strategies can contribute to a sustainable value boost, and the smartest owners will approach tax planning with both the short and long-term of their business in mind. Because, according to Patrick Dichter, owner of Appletree Business Services, “For every dollar not on your tax return, it could cost you $2-$5 when you exit (a matter of not “if” but “when”).
Let’s dive in with that in mind, and as an example, let’s imagine we’re owners of a successful IT consulting business. We’ll look at some of the best tax strategies for small business salary adjustments, retirement contributions, year-end bonuses, equity compensation, donations, and more.
1. Optimizing QBI deduction: The salary adjustment
For salary adjustments, we’ll want to first determine the optimal salary that qualifies for the maximum 20% QBI deduction, considering the 2/7 rule. Use a tax calculator to find the right balance between your salary and business income.
Value boost: By maximizing QBI deductions, we can increase the profitability of the business, making it more attractive to potential buyers down the road.
2. Retirement contributions: Securing the future
Max out your 401(k) contributions ($19,500) and add a SEP IRA for up to 25% of compensation. This reduces current taxable income and enhances employee benefits. Small business 401k tax credits and retirement deductions for small businesses could apply.
Value boost: Strong retirement plans are attractive to potential buyers as they indicate a stable, employee-focused business model, which can increase the business’s overall value.
3. Year-end bonuses: Rewarding performance
The first thing we’ll need to do is to calculate bonuses based on our business performance. How did we do and what can we afford to leverage based on that? We’ll want to make sure our bonuses are processed within the current tax year.
Value boost: Bonuses reflect a profitable, well-managed business. High employee satisfaction and retention rates will radiate a strong foundation to potential buyers.
4. Smart equity compensation
Equity compensation can be exercised strategically — after the options or grants have real value and well before an IPO — to minimize taxes. We’ll want to know about the Alternative Minimum Tax (AMT) and whether it applies. Tax advisors can talk through how to optimize the timing and amount. (Self-employed retirement plans may also come into play here).
Value boost: Well-managed equity compensation plans show fiscal responsibility and foresight — both appealing traits to potential investors or buyers.
5. Donating securities: Philanthropy meets strategy
We’ll want to identify appreciated stocks in our portfolio and consider donating them to a donor-advised fund. The main goals here are to a) get a deduction and b) reduce capital gains owed.
Value boost: This move demonstrates corporate responsibility, enhancing a brand’s value and attractiveness in a sale scenario.
6. Maxing out HSA contributions
We’ll want to look at contributing the maximum to our HSA ($3,550 for individuals, $7,100 for families), considering HSAs for business owners.
Value boost: A fully-funded HSA shows financial chops, which can make it more financially attractive.
7. Energy-efficient improvements: Sustainable tax savings
We’ll want to look at our options for investing in energy-efficient upgrades that might qualify for energy tax credits. If not for Mother Earth alone, sustainability initiatives can be a tax-saving strategy.
Value boost: Sustainable business practices can significantly increase the appeal of your business to environmentally conscious buyers and those who simply want to be sure they’re running operations as efficiently as possible.
8. Income deferral and expense acceleration
We’ll potentially push some income into the next fiscal year while prepaying expenses like rent or utilities within the current year. Strategies for payroll tax deferral and tax deferral reductions should all be on the table for review with a professional tax preparer.
Value boost: This strategy improves current-year profitability, a key metric for valuation during a sale. Note: At Baton, we regularly hear from business owners who weren’t planning to sell their businesses this year but encountered a life circumstance that made selling a priority.
Read my article on the right time to sell your business.
End-of-year tax planning is an intricate dance of maximizing savings and keeping an eye out for ways to increase business value. By discussing these strategies with an accountant, owners can achieve tax savings while also positioning their business as a more valuable and attractive entity for sale at any point in the future. Remember, the specifics can vary, so consult a tax professional to tailor these strategies to your situation.
I put this article together based on my experience and research. Always seek advice from a certified accountant before attempting to implement a new strategy.