10 Tax Planning Strategies You Should Know

As startup founders and top employees, as your company grows, you can move into a higher tax bracket. But this doesn’t necessarily mean that you have to pay higher taxes. With proper guidance, you can find several ways to reduce your federal, state, and local taxes.

In this article, let’s understand the top 10 tax-saving strategies that can be useful while planning your taxes.

Use Section 179 for Business Expensing

For 2024, businesses can expense up to $1,220,000 for eligible property under Section 179, an increase of $60,000 compared to 2023. The threshold for beginning the phase-out of this deduction has been raised to $3,050,000. This benefit can be used no matter how long the property is held within the year.

The Tax Cuts and Jobs Act of 2017 has broadened the scope of Section 179 to include qualified enhancements to nonresidential real estate. This includes improvements to a building’s interior, roofing, HVAC systems, fire protection, alarm systems, and security installations. The deduction also extends to computer software that is commercially available to the public.

Maximize the Qualified Business Income Deduction

QBI deduction allows for a deduction of up to 20% of QBI from eligible pass-through entities like LLCs, partnerships, and S corporations through 2025. To qualify, your taxable income must be below $191,950 for individuals or $383,900 for married couples for specified service businesses.

To optimize this deduction you can use strategies like accelerating business expenses, deferring income to the next tax year, increasing pension plan contributions, raising employee wages, recognizing business losses, and making charitable donations.

For non-specified service businesses that exceed income thresholds, investing in qualified capital assets or further increasing wages can help maximize the deduction.

Contributions to Retirement Accounts

One effective way to lower your taxable income is by fully funding tax-advantaged retirement accounts like 401(k)s, 403(b)s, or IRAs. Traditional IRAs and 401(k)s accept contributions before paying taxes thereby reducing your taxable income for the year. Roth IRAs allow after-tax contributions and offer tax-free growth and withdrawals in retirement.

For example, your earnings are $70,000 and you decide to put $7,000 into a traditional IRA. This contribution can be deducted from your taxable income making it $63,000. It also allows the $7,000 to grow tax-deferred, and you don’t have to pay any taxes on it until you take it out during retirement.

You can file your taxes until April 15, 2025 and contribute to your IRA for the 2024 tax year.

Use Tax-Loss Harvesting

Tax-loss harvesting is a process that allows you to use any capital losses to offset any capital gains you have realized during the tax year. If your capital losses exceed any gains, you can deduct up to $3,000 ( if married) and $1,500 for separate filings against your ordinary income each year. You also have the option to carry forward any remaining losses to future tax years.

Tax-loss harvesting is not applicable within IRAs or 401(k)s, where gains and losses are handled on a tax-deferred or tax-exempt basis.

Equity Compensation and Carried Interests

Startups, PEs, hedge funds, and venture capital funds must also plan for equity compensation and the tax planning around it. Tax rules around ISOs require planning as they trigger AMT when they are sold.

Carried interest tax focuses on the part of a fund’s profits given to investment managers. Make sure any investments tied to carried interest satisfy a three-year holding period for favorable tax treatment. Planning the sale of assets nearing this three-year threshold can secure lower tax rates.

Save Taxes by Gifting

In 2024, you can gift up to $18,000 per person annually without federal taxes and married couples can gift $36,000 per recipient. Tuition payments made through a 529 plan are also tax-exempt.

To gift private company stock you can use a trust to avoid high gift taxes and take advantage of the $13.61 million lifetime gift exemption for 2024, which will decrease by half after 2025.

Plan your Estate through QSBS and GRAT

Qualified Small Business Stock stacking is a strategic estate planning method that allows company founders and investors to exclude gains from federal taxes by gifting portions of QSBS to family members or trusts. Each recipient can claim their tax exclusion.

Another estate planning tool is the GRAT (Grantor Retained Annuity Trust) used for transferring stocks that are expected to appreciate. Under GRAT, stocks are valued at the price of contribution, not at its later appreciated value.

Throughout the term, you receive an annuity which is a fixed percentage of the initially contributed value. At the end of the trust’s term, any remaining value is transferred to the designated recipients.

Time your Income to save Taxes

Timing your income through methods like Non-qualified deferred compensation, the timing of stock options, or bonus arrangements — can drastically reduce tax liabilities. Determine whether it’s more beneficial to advance income to a year with lower taxes or defer it to a future year when you anticipate lower tax rates.

For example, a high-earning executive can defer receiving a bonus by placing it into an NQDC plan and spreading the income. It will reduce the tax burden across several years post-retirement.

You can also manage your capital gain taxes in a similar manner by timing the sale of your assets depending on anticipated tax rate changes.

Charitable Contributions for Tax Reduction

For 2023 and 2024, you can deduct cash donations up to 60% of your adjusted gross income and also claim deductions for both cash and non-cash donations per IRS guidelines. Report your donations on Schedule A of IRS Form 1040.

For example, with an AGI of $200,000, you can deduct up to $120,000 in cash donations to qualified organizations.

Keeping Up with Tax Law Changes

Tax regulations are constantly changing and can influence your financial decisions. You must stay updated on these changes and consult with a tax professional to understand how new tax laws affect you and your business.

Simplify your Taxes with Eqvista

Eqvista’s tax and equity advisory services cater to both corporations and individuals with customised solutions to unique requirements of each client. Our philosophy blends tax planning with equity management to enhance clarity and agility in decision-making.

Eqvista has become the preferred choice for founders, employees, and investors across different industries and company sizes.

Contact us today to optimize your tax savings and maximize your financial gains!