Tax Planning for Entrepreneurs: 20 Best Practices and Pitfalls to Avoid

By Greg Grzesiak Greg Grzesiak has been verified by Muck Rack's editorial team
Published on February 9, 2024

Navigating tax obligations can be a complex task for entrepreneurs, so we’ve compiled the wisdom of twenty financial experts and business leaders to guide you. From maximizing retirement contributions early to investing in quality bookkeeping services, CEOs and founders share their most effective tax planning strategies and personal tips.

  • Maximize Retirement Contributions Early
  • Utilize All Eligible Tax Deductions
  • Set Up HSA or FSA Accounts
  • Employ Strategic Tax-Loss Harvesting
  • Adjust Estimated Tax Payments Quarterly
  • Document Business Expenses for Deductions
  • Capitalize on Tax-Advantaged Investments
  • Maximize R&D Tax Credits
  • Incorporate Life Insurance in Tax Planning
  • Stay Current with Tax Law Changes
  • Schedule Monthly Tax Updates
  • Plan with a Tax Professional Regularly
  • Analyze State Tax Impact on Business
  • Choose the Right Business Legal Structure
  • Claim Home-Office Deductions
  • Make Charitable Contributions
  • Understand International Tax Planning
  • Monitor Tax Legislation Changes
  • Set Up a Solo 401(k) Plan
  • Invest in Quality Bookkeeping Services

Maximize Retirement Contributions Early

If there’s one piece of advice I could offer to fellow entrepreneurs about tax planning, it would be this: Treat it like gardening. Yes, you heard right—gardening. Just as a well-tended garden requires regular attention, so does your tax strategy. The key is to get ahead of it early in the year and keep a consistent eye on it, rather than waiting until tax season is upon you and scrambling to find every possible deduction under the sun.

One strategy that has been invaluable to me, and which I liken to planting perennials in that garden, is maximizing retirement contributions. Early in my entrepreneurial journey, I discovered the power of using retirement accounts not just as a tool for future financial security but also as a savvy tax-planning tactic. By contributing to a retirement account, like a Solo 401(k) or a SEP IRA, you’re essentially doing two things: securing your future self’s financial independence and reducing your current taxable income. It’s a win-win.

Here’s a bit of personal insight: In my first year of serious profit, I was looking at a sizable tax bill. The thought was as daunting as facing a garden overrun with weeds after a rainy season. That’s when I delved into the world of retirement contributions. By maximizing my contributions, I managed to lower my taxable income significantly, which, in turn, reduced my tax liability. It was like finding a hidden path through a thicket that led to a sunlit clearing. Not only did this strategy help me save on taxes, but it also accelerated my retirement savings, putting me on a much firmer financial footing.

But here’s the twist: You need to plan these contributions throughout the year. Waiting until the last minute to make retirement contributions is like trying to plant a garden the day before winter hits; it’s not going to yield the best results. Regularly setting aside money for retirement contributions ensures that you’re not caught off guard when it’s time to pay taxes or when the contribution deadlines approach.

Michael DionMichael Dion
Chief Finance Nerd, F9 Finance

Utilize All Eligible Tax Deductions

One essential tax-planning strategy for entrepreneurs is to take full advantage of all eligible tax deductions and credits. This requires a deep understanding of what expenses can be legitimately claimed to reduce taxable income. For instance, we meticulously tracked all business-related expenses, including office supplies, travel expenses, and even a portion of our home office costs. A specific example was when we invested in new technology for our business.

By understanding the tax code, we were able to claim these expenses as deductions, significantly lowering our taxable income for that year. Additionally, we took advantage of tax credits available for businesses that invest in research and development, which was a major part of our operations.

My tip for fellow entrepreneurs is to invest time in understanding the tax benefits that apply to your specific business activities or consider consulting with a tax professional. Keeping thorough records of all business-related expenses and staying informed about changes in tax laws can lead to substantial savings, helping to reduce the overall financial burden and potentially reinvesting those savings back into the business.

Niclas SchlopsnaNiclas Schlopsna
Managing Consultant and CEO, spectup

Set Up HSA or FSA Accounts

If you have significant self-employment income, my advice is to consider setting up a Health Savings Account (HSA) or a Flexible Spending Account (FSA) to cover qualified medical expenses.

Contributing pre-tax dollars to these accounts reduces taxable income while providing for healthcare needs. Be sure to stay informed about the contribution limits and eligible expenses associated with these accounts to maximize their benefits.

Chad SultanaChad Sultana
Founder, Chad Sultana

Employ Strategic Tax-Loss Harvesting

Don’t overlook the benefits of tax-loss harvesting, especially if you have investment portfolios. My advice is to regularly review your investments and strategically sell assets with losses to offset gains, reducing your overall tax liability.

Keep in mind that there are specific rules and limitations regarding tax-loss harvesting, so consult with a tax professional or financial advisor to ensure compliance and maximize tax savings.

David GaglioneDavid Gaglione
Founding Partner, PS212

Adjust Estimated Tax Payments Quarterly

My advice is to regularly review and adjust your estimated tax payments as your business income fluctuates. Overpaying or underpaying estimated taxes can lead to penalties or missed opportunities for tax optimization.

Monitoring your financial performance and adjusting estimated payments accordingly is a prudent approach. Collaborating with an accountant or tax advisor to assess your income projections and calculate accurate quarterly payments can help you maintain financial stability and compliance.

Gillian DewarGillian Dewar
Chief Financial Officer, Crediful

Document Business Expenses for Deductions

One tax-planning strategy I highly recommend to entrepreneurs is the strategic use of business expenses to reduce taxable income. Business expenses, if necessary and directly related to your business, can be deducted from your taxable income.

I worked with an entrepreneur who ran a small consulting firm. He was initially unaware that costs for travel, meals, home office, and even certain educational expenses could be deducted. Once we started accounting for these expenses, there was a noticeable reduction in his taxable income, thus resulting in lower tax obligations.

It’s worth noting that these deductions must be legitimate and documented to stand up to potential IRS scrutiny. I suggest keeping detailed records and seeking the guidance of a tax professional to ensure the appropriateness and accuracy of these deductions.

Adam FayedAdam Fayed

Capitalize on Tax-Advantaged Investments

Exploring tax-planning strategies related to business investments is essential. My advice is to consider capitalizing on tax-advantaged investment options, such as Qualified Opportunity Zones (QOZ) or tax-efficient investment accounts, to minimize capital gains taxes and maximize returns.

Keep in mind that these investment strategies often come with specific requirements and timelines, so thorough research and professional guidance are crucial for success.

Bert HofhuisBert Hofhuis
Founder, Every Investor

Maximize R&D Tax Credits

A key strategy I recommend to fellow entrepreneurs is maximizing tax credits available for research and development (R&D).

We leveraged R&D tax credits extensively. These credits are designed to encourage businesses to invest in innovation, which is often costly. By taking advantage of these credits, we were able to offset some of the significant expenses involved in R&D, reducing our overall tax burden.

This strategy provided financial relief and reinforced our commitment to pushing the boundaries of renewable energy technology. Entrepreneurs need to be aware of such opportunities and plan accordingly. Proper utilization of R&D tax credits can be a game-changer, especially for startups and businesses in technology-driven fields. I advise you to work closely with a knowledgeable tax professional who can guide you in identifying and applying for relevant tax credits, ensuring that you can invest more resources into your business’s growth and innovation.

Andrew Van NoyAndrew Van Noy
Founder & CEO, DeepPower, Inc.

Incorporate Life Insurance in Tax Planning

For entrepreneurs exploring effective tax planning strategies, incorporating life insurance offers a blend of risk management and tax efficiency. This approach not only secures your financial legacy but also aligns with strategic business planning for growth and stability.

Cash value life insurance policies (like whole life and universal life) grow tax-deferred, enhancing your wealth without immediate tax implications. Also, life insurance proceeds are generally tax-free to beneficiaries, offering a straightforward, efficient way to transfer wealth or secure business continuity.

Policies with a cash value component can be used to withdraw or borrow against for retirement income, typically tax-free. Additionally, the ability to premium finance, or use bank-funded retirement strategies, allows entrepreneurs to leverage larger policies without depleting personal or business liquidity, providing a sophisticated, tax-efficient retirement funding source.

Lastly, funded with life insurance, these agreements ensure business continuity and a clear succession plan without creating a tax burden, following the death of an owner.

Life insurance transcends its traditional role as a safety net, offering entrepreneurs a strategic tool for tax planning. Leveraging the policy’s flexibility to protect, grow, and plan for the future in a tax-efficient manner is key. Engaging with financial professionals to tailor this approach to your unique needs will optimize the benefits, making life insurance a pivotal part of your financial strategy.

Delante GreerDelante Greer
Financial Planner, Opulentia LLC

Stay Current with Tax Law Changes

Staying informed about changes in tax laws is essential. My tip is to subscribe to tax-related newsletters, follow updates from relevant government agencies, consider attending tax seminars or webinars, and consult your tax advisor to stay up-to-date.

Timely knowledge of tax law changes can help you adapt your business practices to take advantage of new opportunities or navigate potential challenges.

Ian SellsIan Sells
CEO, Million Dollar Sellers

Schedule Monthly Tax Updates

One strategy I always recommend is to have a monthly tax update. It’s not only a great way to stay on top of your finances, but it also helps you avoid any surprises when tax season rolls around. I know how hectic running a business can be, and it’s easy to overlook certain tax obligations. But by taking a little time each month to review your taxes, you’re making sure that everything is accounted for.

Loren HowardLoren Howard
Founder, Prime Plus Mortgages

Plan with a Tax Professional Regularly

To stay ahead of tax obligations, I recommend scheduling regular tax-planning sessions with a qualified tax professional well before the tax deadline. These meetings allow entrepreneurs to assess their financial situation, explore tax-saving opportunities, make informed decisions throughout the year, and ensure they meet their tax obligations effectively. Proactive tax planning can help entrepreneurs avoid surprises and optimize their tax strategy.

Tim WhiteTim White
Founder, milepro

Analyze State Tax Impact on Business

Evaluating the impact of state and local taxes on your business is crucial. I recommend conducting a state tax analysis to determine the most tax-friendly location for your operations. Different states have varying tax rates, incentives, and regulations that can significantly affect your tax burden. Choosing the right state for your business can lead to substantial tax savings and improved profitability.

John HughesJohn Hughes
CEO, ContractorNerd

Choose the Right Business Legal Structure

When I’m building my business, I put a lot of thought into how to make it as tax-efficient as possible. It’s very important for me to carefully think about which legal arrangement will work best for my specific situation. Getting help from an experienced tax professional is crucial during this process because their knowledge helps you figure out the details of how different forms affect your taxes.

Usually, the research includes considerations when deciding whether to run the business as a sole proprietorship, an LLC, an S corporation, or a C corporation. Each choice has its own unique features that can have a significant effect on things like income tax, self-employment tax, and total tax liability. Working with a tax expert ensures that all of these factors are carefully considered.

This gives me the information I need to make decisions that are not only legal but also set up my business for long-term financial success. This careful process of selecting the right legal structure becomes an integral part of my overall business strategy, helping to ensure that financial responsibility and operational efficiency are perfectly aligned.

Matthew O'SullivanMatthew O’Sullivan
CEO, Subsidence Ltd.

Claim Home-Office Deductions

Entrepreneurs operating from home offices should explore home-office deductions. Calculating the square footage of your dedicated home-office space and claiming allowable expenses like utilities, rent, or mortgage interest related to that space can lead to substantial tax savings.

Properly documenting these expenses is crucial. I suggest keeping detailed records and receipts to support your claims and ensure compliance with IRS guidelines.

Sturgeon ChristieSturgeon Christie
CEO, Second Skin Audio

Make Charitable Contributions

Charitable contributions can be a tax-efficient way to support causes you believe in while reducing your taxable income. Consider establishing a corporate giving program or donating surplus inventory to eligible charities.

Keep meticulous records of your contributions to claim the appropriate deductions. Collaborate with charitable organizations and consult a tax advisor to ensure compliance with tax laws and maximize the impact of your donations.

Thaddeus WendtThaddeus Wendt
Partner & CEO, Feller Wendt, LLC

Understand International Tax Planning

My advice is to delve into international tax planning if your business has global operations or international transactions.

Understanding transfer pricing, foreign tax credits, and tax treaties can help you minimize double taxation and ensure compliance with international tax laws. International tax planning is a complex field, and seeking guidance from experts with international tax expertise is essential to navigate this terrain effectively.

Ryan HammillRyan Hammill
Executive Director, Ancient Language Institute

Monitor Tax Legislation Changes

My recommendation is to stay informed about changes in tax legislation. Tax laws can undergo frequent revisions, and staying up-to-date ensures you can adapt your tax strategy accordingly.

Subscribing to tax news updates, joining business associations, or working with a tax advisor who monitors legislative changes can help you remain compliant and tax-efficient. Regularly reviewing your tax strategy in light of new tax laws and regulations is essential to ensure you’re taking full advantage of available deductions and credits.

Jim PendergastJim Pendergast
Senior Vice President, altLINE Sobanco

Set Up a Solo 401(k) Plan

When it comes to tax planning for entrepreneurs, there’s a little secret I’ve learned through trial and error. It’s like finding hidden treasure. I always suggest setting up a Solo 401(k) plan. It’s a goldmine of tax advantages.

You see, I did it myself, and it’s been a game-changer. Not only can you save big on taxes, but you’re also building your retirement nest egg. It’s like having your cake and eating it too.

Mark ShengMark Sheng
Project Engineer, DoDo Machine

Invest in Quality Bookkeeping Services

It’s not always the cheapest, but hiring a good bookkeeper (even outsourced) is invaluable. If you are considering the investment (typically $400–$500 per month), it’s worth it in many ways.

Examples of things that they can help you get ahead of are W-9s, classification of expenses, reconciling projections, and advising you on strategic moves during the course of the business year. When you outsource, you typically will meet with them each month.

Aaron GrimesAaron Grimes
Industrial Sales, Marketing and Product Manager, TYKMA Electrox

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By Greg Grzesiak Greg Grzesiak has been verified by Muck Rack's editorial team

Greg Grzesiak is an Entrepreneur-In-Residence and Columnist at Grit Daily. As CEO of Grzesiak Growth LLC, Greg dedicates his time to helping CEOs influencers and entrepreneurs make the appearances that will grow their following in their reach globally. Over the years he has built strong partnerships with high profile educators and influencers in Youtube and traditional finance space. Greg is a University of Florida graduate with years of experience in marketing and journalism.

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