How to Optimize Your Tax Return for More Business Tax Savings

In this episode, Brian Thompson discusses key insights from the recent tax season, highlighting trends, surprises, and strategic opportunities for business owners to optimize their tax planning and financial health. Your tax return is not something to file and forget. If you pay attention, your tax return gives you a roadmap for what to do better this coming year. Brian also gives real-life examples of two clients that stood out this tax season.

Understanding Unexpected Tax Outcomes

One of the most significant stress points during tax season is the unexpected tax outcome. Many business owners were pleasantly surprised this year, either owing less than they anticipated or receiving larger refunds than expected. However, it's crucial to remember that a refund is not a reward and a tax bill is not a punishment. It simply reflects the reconciliation of what you owe versus what you've already paid.

Increased Interest and Dividend Income

This year also saw a spike in interest and dividend income for many business owners due to significant investment gains and the movement of cash into higher-yield savings accounts. While these gains are beneficial, they can also lead to increased taxable income, resulting in a higher tax bill than anticipated. Many individuals fail to account for all forms of income when calculating their estimated taxes, leading to potential penalties. It's vital to consider every aspect of your income when planning your tax estimates.

Planning for Underpayment Penalties

Self-employed individuals, in particular, have reported a rise in underpayment penalties. This situation can occur even if you make estimated payments but fail to do so on time or for the correct amount. If your income has increased but your estimated payments have not adjusted accordingly, the IRS will catch up with you. To avoid these pitfalls, ensure your estimated tax payments reflect your actual income. Regularly review and adjust your estimates as necessary to avoid surprises come tax season.

How to optimize your tax return next year

Benefits of increased SALT deduction

This year, many clients experienced unexpected results due to changes in the state and local tax (SALT) deduction. For example, one high-income business owner noticed a significant drop in their tax bill, while another client could itemize deductions for the first time ever, despite having no mortgage interest. This is a huge shift for high-income earners in high-tax states. Since this is new, this is your opportunity to become proactive. Plan ahead and strategize around the timing of payment or entity-level tax elections.

Maximizing Retirement Contributions

One area where many business owners fall short is maximizing their retirement contributions. Many do not take full advantage of their solo 401(k)s or SEP IRAs, either out of lack of knowledge or because they think it's too late to contribute. Remember, these accounts can significantly reduce your taxable income while helping you build long-term wealth. Don't let procrastination or confusion keep you from maximizing your retirement contributions. You can still contribute until the filing deadline, so take advantage of this opportunity to lower your taxable income.

Self-employed health insurance

This is another area where proactive planning makes a huge difference. I've seen people miss these deductions or owe money unexpectedly. Make sure you review your Schedule 1 to ensure you are making the most of your deductions.

The Importance of Bookkeeping

The state of your bookkeeping is foundational to your tax return. Messy records can lead to missed deductions and poor decision-making, turning tax season into a stressful experience. Clean and organized books not only simplify tax planning but also improve cash flow and strategic deductions.

If your books weren't well-maintained this year, take the time after tax season to ensure everything remains in order. Regular reviews will make tax time far less daunting in the future.

Your Action Step

Your tax return is not just a document to file away. It's a roadmap that highlights where you can improve and where opportunities have been missed. Take 30 minutes and review your tax return with this question: "What surprised me and why?" Was it a higher tax bill, a missed deduction or something you didn't understand? Every surprise is something you can fix next year.

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About Brian and the Mission Driven Business Podcast

Brian Thompson, JD/CFP®, is a tax attorney and Certified Financial Planner® who specializes in providing comprehensive financial planning to LGBTQ+ entrepreneurs who run mission-driven businesses. The Mission Driven Business podcast was born out of his passion for helping social entrepreneurs create businesses with purpose and profit.

On the podcast, Brian talks with diverse entrepreneurs and the people who support them. Listeners hear stories of experiences, strength, and hope and get practical advice to help them build businesses that might just change the world, too.