4 Tax Strategies That Could Save Your Business Thousands

Thoughtful tax planning can be the difference between keeping thousands in your pocket or sending them to the IRS. While many business owners focus on growing revenue, the most successful ones understand that strategic tax planning is equally important for building wealth. Here are four powerful strategies that can significantly reduce your tax burden.

Cash Basis Filings: Timing Is Everything

One of the most straightforward ways to manage your tax liability is through cash basis filing. Cash basis accounting is a method where businesses record revenue when cash is received and expenses when money is paid out, regardless of when the income was earned or the expense was incurred.

As CJG partner Hank Boone explains, “You’re kicking the can down the road effectively. So you’re paying tax on anything that you received in cash versus paying on receivables that you haven’t received yet.”

This strategy works particularly well for service-based businesses. Steve Burns, CJG partner, notes that cash basis filing gives you flexibility because “you can push and pull revenue and expenses. It gives you a little bit more flexibility in the overall picture.” The key advantage is timing – you can accelerate expenses into the current year by paying vendors early, potentially reducing your taxable income for the year.

However, this strategy has limits. The IRS defines small businesses based on gross receipts, and as Hank clarifies, “businesses with gross receipts under $31 million can file cash basis, while those above this threshold must use the accrual method.”

Retirement Savings: A Win-Win Strategy

Do you have a retirement plan? If not, you’re missing out on significant tax savings and employee retention benefits.

In Illinois, businesses with five or more employees are subject to additional requirements. If you don’t offer a retirement plan, the state requires you to participate in Illinois Secure Choice, where employee contributions are automatically deducted. As CJG partner Ken Orth points out, “Employer contributions are an additional deduction, and it’s a great way to retain talent.” 

For business owners looking to maximize their retirement contributions, cash balance plans offer exceptional opportunities. These plans allow owners to contribute significantly more toward their retirement while still benefiting employees. 

Here’s a valuable timing strategy: even if you’re on a cash basis, retirement plan contributions work differently. You can claim the tax deduction in the current year, but don’t have to make the actual cash payment until the due date of your tax return, including extensions. This gives you more time to fund the contribution while still receiving the immediate tax benefit.

Pass-through Entity Tax: A Response to Tax Reform

The Tax Cuts and Jobs Act of 2017 limited state and local tax deductions to $10,000 on individual returns. States responded by creating pass-through entity taxes, which allow pass-through entities, such as S corporations and partnerships, to pay state-level taxes on behalf of their owners, and the entity receives a corresponding deduction at the federal level. In turn, the reduced federal taxable income is passed through to the owners, resulting in federal tax savings. 

This strategy transforms what was previously a non-deductible personal expense into a business deduction. “In the past, you would pay this on your personal income tax, and it was not deductible,” Ken notes. Now, the entity can take a federal deduction for state taxes paid, potentially saving thousands annually.

Research and Development Credit: Broader Than You Think

Don’t assume the R&D credit only applies to tech companies – it’s broader than you think. Whether you’re creating prototypes, improving processes, or developing new methods, you might qualify.

The credit examines labor costs, material costs, and contractor expenses. To qualify, your current year R&D expenditures must exceed your three-year average. Given the complex documentation requirements and potential for IRS scrutiny, it’s recommended to hire an engineering firm to conduct the study. These firms typically provide audit support if your credit is questioned, ensuring proper documentation and defense of your claims.

These four strategies – cash basis filing, retirement planning, pass-through entity tax, and R&D credits – can deliver substantial tax savings when implemented correctly. However, this is just the beginning of what’s possible with strategic tax planning. In Part Two, we’ll explore five additional powerful strategies, including cost segregation studies, depreciation optimization, nexus studies for multi-state businesses, Section 1202 benefits for startups, and the critical importance of choosing the correct business entity. 

Each business situation is unique. Make sure to consult with tax professionals to determine which strategies best fit your circumstances and maximize your savings. CJG is here to help. Reach out to us today to talk about the best tax strategies for your business.

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