Running a successful business isn’t just about increasing revenue—it’s also about keeping more of what you earn. While many taxpayers think about taxes only during filing season, the most effective tax savings are achieved through proactive planning throughout the year.
At Complete CPA Solutions, we help business owners identify opportunities to reduce taxes, improve cash flow, and build long-term wealth through strategic tax planning. Every business is unique, so not every strategy applies to every taxpayer. However, understanding the options available can help you make informed decisions before year-end.
At a Glance
This guide covers:
-
Optimizing reasonable compensation
-
Solo 401(k) retirement plans
-
Mega Backdoor Roth contributions
-
Backdoor Roth IRA strategies
-
Pass-Through Entity Tax (PTET) elections
-
Health Savings Accounts (HSAs)
-
Accountable plans
-
The Augusta Rule
-
Additional year-round tax planning strategies
Tax Planning vs. Tax Preparation
Many people use the terms interchangeably, but they serve different purposes.
| Tax Preparation | Tax Planning |
|---|---|
| Reports last year’s income | Focuses on reducing future taxes |
| Compliance driven | Strategy driven |
| Usually completed once a year | Ongoing throughout the year |
| Looks backward | Looks forward |
Tax preparation ensures your return is filed correctly. Tax planning helps you legally reduce future taxes before filing season arrives.
1. Consider Electing S Corporation Taxation
Many small businesses begin as single-member LLCs. As profits grow, electing to have an LLC taxed as an S corporation may reduce self-employment taxes.
Instead of paying self-employment tax on all business profits, an S corporation generally allows owners to receive:
-
A reasonable salary subject to payroll taxes.
-
Remaining business profits distributed without self-employment tax.
An S corporation is not appropriate for every business. Factors such as profitability, payroll costs, administrative requirements, and long-term goals should all be considered before making the election.
2. Establish a Reasonable Salary
Many business owners focus only on minimizing payroll taxes.
However, paying an appropriate salary can also impact:
-
Qualified Business Income (QBI) deductions.
-
Retirement plan contribution limits.
-
Social Security earnings history.
-
IRS compliance.
Finding the right balance often produces a better overall tax result than simply paying the lowest possible salary.
3. Maximize Retirement Savings with a Solo 401(k)
For many self-employed individuals with no full-time employees, a Solo 401(k) offers significant flexibility.
Compared to a SEP IRA, a Solo 401(k) may provide:
-
Higher contribution opportunities in certain situations.
-
Employee salary deferrals.
-
Employer profit-sharing contributions.
-
Roth contribution options if offered by the plan.
-
Greater planning flexibility.
Choosing the appropriate retirement plan depends on your income, age, business structure, and long-term retirement goals.
4. Consider a Mega Backdoor Roth Strategy
For business owners with a Solo 401(k) plan that permits after-tax contributions and in-service conversions, a Mega Backdoor Roth strategy may allow substantially larger amounts to be moved into Roth accounts.
Potential advantages include:
-
Future tax-free qualified withdrawals.
-
Long-term tax-free investment growth.
-
Greater retirement flexibility.
Because these strategies involve plan design requirements and IRS contribution limits, proper implementation is critical.
5. Utilize a Backdoor Roth IRA When Appropriate
High-income taxpayers often exceed the income limits for direct Roth IRA contributions.
A Backdoor Roth strategy may allow these taxpayers to fund a Roth IRA indirectly through a nondeductible traditional IRA contribution followed by a Roth conversion.
Before using this strategy, it’s important to consider:
-
Existing traditional IRA balances.
-
The pro-rata rule.
-
Timing of conversions.
-
Overall retirement planning objectives.
6. Evaluate the Pass-Through Entity Tax (PTET) Election
Many states—including Colorado—offer Pass-Through Entity Tax elections.
Depending on your situation, a PTET election may:
-
Increase federal deductions.
-
Reduce the impact of the federal SALT limitation.
-
Produce meaningful tax savings for business owners.
Because PTET elections vary by state and often have annual deadlines, they should be evaluated before year-end.
7. Take Advantage of a Health Savings Account (HSA)
If you qualify through a high-deductible health plan, an HSA can be one of the most tax-efficient savings vehicles available.
HSAs offer a unique triple tax benefit:
-
Contributions may be tax deductible.
-
Investment earnings grow tax-free.
-
Qualified medical withdrawals are tax-free.
Unused balances can continue growing year after year, making an HSA valuable for both current healthcare costs and long-term retirement planning.
8. Reimburse Yourself Through an Accountable Plan
Many business owners unknowingly pay business expenses personally without reimbursement.
An accountable plan allows eligible expenses to be reimbursed by the business while generally avoiding taxable income to the owner.
Potential reimbursable expenses may include:
-
Home office expenses.
-
Business mileage.
-
Cell phone usage.
-
Internet service.
-
Office supplies.
-
Professional dues.
-
Continuing education.
Proper documentation is essential.
9. Understand the Augusta Rule
The Augusta Rule allows homeowners to rent their personal residence to their business for up to 14 days each year under certain circumstances.
When properly documented, this strategy may allow:
-
A deductible business expense.
-
Rental income excluded from taxable income under the applicable rules.
The rental amount should reflect fair market value, and appropriate documentation should be maintained.
10. Additional Tax Planning Strategies
No single strategy fits every business. Other planning opportunities may include:
Cost Segregation Studies
Accelerate depreciation deductions for qualifying real estate investments.
Section 179 and Bonus Depreciation
Evaluate whether purchasing equipment before year-end may provide immediate deductions.
Timing Income and Expenses
Depending on your tax situation, accelerating deductions or deferring income may improve overall tax efficiency.
Estimated Tax Planning
Regular projections throughout the year can help avoid underpayment penalties and unexpected tax bills.
Qualified Business Income (QBI) Planning
Income levels, wages, and business structure can all affect the available deduction.
Charitable Giving Strategies
Depending on your circumstances, bunching charitable contributions or using Qualified Charitable Distributions (QCDs) may improve tax efficiency.
Hiring Family Members
Employing family members may provide legitimate tax planning opportunities while helping fund retirement or education savings.
Entity Structure Reviews
Businesses evolve and the business entity selection can become important in tax planning. An entity that was appropriate several years ago may no longer be the most tax-efficient choice.
Accurate Bookkeeping
Tax planning depends on reliable financial information. Maintaining accurate books throughout the year allows better forecasting, cash flow management, and informed planning decisions.
Common Tax Planning Mistakes
Many taxpayers miss opportunities simply because they wait too long.
Common mistakes include:
-
Waiting until tax season to seek advice.
-
Poor bookkeeping.
-
Missing retirement contribution opportunities.
-
Ignoring estimated tax payments.
-
Choosing the wrong business entity.
-
Failing to review changing tax laws annually.
When Should Tax Planning Begin?
Effective tax planning is not a once-a-year event.
Many of the best opportunities must be implemented before December 31, while others should be considered when:
-
Starting a business.
-
Purchasing equipment.
-
Hiring employees.
-
Buying investment property.
-
Selling appreciated assets.
-
Planning retirement.
Regular planning meetings throughout the year often provide significantly better results than waiting until tax return preparation.
Frequently Asked Questions
Is tax planning only for large businesses?
No. Even sole proprietors and small businesses can benefit from proactive tax planning.
How often should I meet with my CPA for tax planning?
Many business owners benefit from meeting at least annually, while growing businesses often benefit from quarterly planning.
Is an S corporation always the best option?
No. The right entity depends on profitability, payroll needs, long-term goals, and many other factors.
Can tax planning reduce my tax liability?
Proper planning may reduce taxes by taking advantage of available deductions, credits, and tax-efficient strategies permitted under current law.
When should I start tax planning?
The earlier the better. Waiting until tax filing season often limits the number of strategies still available.
Work with a Denver CPA Who Plans Ahead
The best tax strategy is the one designed specifically for your business.
At Complete CPA Solutions, we work with business owners throughout Denver and beyond to develop proactive tax planning strategies that align with their goals. Whether you’re evaluating an S corporation election, maximizing retirement contributions, implementing a PTET election, or simply looking for ways to improve tax efficiency, we’re here to help.
Schedule a discovery call today to learn how proactive tax planning can help your business keep more of what it earns.
