From taxes to other planning, there are a number of things small businesses can do for better financial security and peace of mind.
For small businesses, planning can feel daunting. As financial advisors, one thing we do is help small business owners through the maze of tax and insurance considerations. While planning may not always be the most glamorous topic, it’s undeniably important for the success and sustainability of any small business.
Recently we spent time sharing our best practices for individuals/families for doing their taxes. However, today we’re exploring four key considerations (including tax deductions) for small businesses and how strategic planning can lead to better financial security and peace of mind.
Small Business Consideration 1: Protection Through Insurance
Protecting your small business against unforeseen events is necessary. Protection can come in various forms, including professional and product liability insurance.
What is professional liability insurance?
Professional liability insurance shields your company from claims of negligence or failure to perform professional duties. According to our experience, as well as sources like Nerd Wallet, businesses that provide services for a fee (accountants, architects, consultants, including management and IT consultants, engineers, and more) should have professional liability insurance.
Who needs product liability insurance?
Product liability insurance covers any damages caused by products your business sells.
As the US Chamber of Commerce puts it, “Product liability isn’t just for companies that manufacture products. Any company that sells, distributes, or designs products would also do well to enroll in business liability insurance. Without this protection, applicable companies risk everything.”
These insurances provide financial protection and offer peace of mind. It’s helpful knowing that your business is safeguarded against potential lawsuits or claims that could otherwise hinder your operations. If you need more explanation, the SBA further breaks product and professional liability.
Small Business Consideration 2: Maximizing Tax Deductions
Small business owners often overlook numerous tax deductions available to them. This oversight can significantly reduce their tax burden. Some common deductions include expenses related to:
- Home office: If you use a portion of your home exclusively for business purposes, you may be eligible to deduct expenses, including rent, utilities, or insurance.
- Business equipment and supplies: Computers, software, office furniture, and even mileage for business-related travel are typically deductible expenses.
- Marketing and advertising: Expenses incurred for promoting your business, such as website development, advertising campaigns, and networking events, can be deducted.
- Professional services: Fees that you pay to accountants, lawyers, consultants, or other professionals directly related to your business activities are deductible.
These are just some of our top suggestions, but if you want more, Forbes Finance Counsel shares 15 overlooked areas for small businesses. All in all, by leveraging deductions, small business owners can optimize their tax strategy and retain more of their hard-earned income.
Small Business Consideration 3: Retirement Plans for Owners and Employees
Planning for retirement is essential, even for small business owners with fewer than 20 employees. Establishing retirement plans not only helps secure the financial future of the business owner but also serves as a valuable employee benefit, aiding in talent acquisition and retention.
Retirement plan options, including Simplified Employee Pension (SEP) IRAs, 401(k) plans, and SIMPLE IRAs, offer tax advantages and flexibility for small businesses. These plans allow both employers and employees to contribute to retirement savings. And, these contributions are often tax-deductible for the company. And, under the IRS’s guidelines, eligible employers may be able to claim a tax credit of up to $5,000, for three years, for the ordinary and necessary costs of starting a SEP, SIMPLE IRA, or qualified plan (like a 401(k) plan.) A tax credit reduces the amount of taxes you may owe on a dollar-for-dollar basis.
Implementing a retirement plan not only provides tax benefits for you but also demonstrates a commitment to the long-term financial well-being of the business and its employees.
Small Business Consideration 4: Life Insurance for Business Continuity
You — and your business partners — want a plan for your business in case the unthinkable happens, especially if your spouse or other heirs are not suited to continue in your absence.
Business continuation insurance is a form of life and disability insurance that covers losses if a key executive, partner, or business owner becomes disabled or dies.
For companies with multiple owners, ensuring continuity in the event of a partner’s death is a step that often gets overlooked. Life insurance works like a financial safety net, providing funds for a smooth transition of ownership and ensuring the business can continue operating without disruption.
Two primary types of life insurance are typical in this scenario: a buy-sell agreement or key person insurance.
What is a Buy-Sell Agreement?
A buy-sell agreement funded by life insurance ensures that if one owner passes away, the surviving owners have the funds to buy out the deceased owner’s share of the business. This arrangement prevents conflicts and uncertainties that could arise regarding ownership and control.
There are two main types of buy-sell agreements:
- Cross-purchase buy-sell agreement: business owners buy a life insurance policy on the other owner(s). The benefit gets paid to the surviving owners, who can then use the money to buy out the deceased owner’s interest.
- Entity purchase buy-sell agreement: the business itself buys a life insurance policy on each of the owners. The death benefit is paid to the business, which can then use the funds to buy out the deceased owner’s interest.
What is Key Person Insurance?
Key person insurance protects your business against financial loss resulting from the death of a key employee or owner. The policy provides a cash benefit to the business, helping cover lost income, recruiting expenses for a replacement, or other costs associated with the loss.
By holding life insurance policies on each other or key employees, business owners can mitigate the financial risks associated with unexpected events to encourage the continuity and stability of their operations.
Positioning For Long-term Success
Navigating the complex landscape of small business taxes requires careful planning and strategic decision-making. It can be well worth your time to seek professional guidance to ensure you don’t miss out on any money-saving opportunities.
By prioritizing protection through insurance, maximizing available tax deductions, implementing retirement plans, and securing life insurance for business continuity, small business owners can position themselves for long-term success and financial stability.
At Northern Lights Advisors (and as a small business ourselves), we believe small business owners should feel empowered to make informed financial decisions supporting their growth and prosperity. Please contact our firm if you have questions or need assistance during the tax season.
Northern Lights Advisors provides financial planning and investment management services as a fiduciary, fee-only, Registered Investment Advisor (RIA) firm. If you’d like to talk more about tax planning or other financial considerations, schedule a free consultation with an advisor today.