6 steps for entrepreneurs and tax planning

For government contractors who are entrepreneurs seeking to optimize their financial landscape, minimizing tax liability is a top priority.  In this guide, we explore five legitimate ways entrepreneurs can navigate the complex world of tax planning without crossing into illegal territory.

Harness the Power of Qualified Retirement Plans:

Investing in qualified retirement plans offers a dual benefit: immediate tax deductions and tax-deferred growth. While 401(k) plans are familiar, entrepreneurs should also explore defined benefit plans (DB plans) for their potential to allow higher contributions, offering a strategic advantage in tax planning.

Establish Captive Insurance Companies for Risk Management:

Captive insurance companies, or "captives," provide a unique avenue for entrepreneurs to manage risks while enjoying tax benefits. By setting up a closely held insurance company, business owners can gain control over operations and potentially benefit from tax-deductible premiums. Seeking the guidance of a high-quality accountant is crucial to optimizing deductions in this strategy.

Utilize Charitable Trusts for Capital Gains Elimination

Entrepreneurs looking to sell appreciated assets, such as a business, can leverage charitable trusts to eliminate capital gains taxes. By gifting equity to a charitable trust, not only do capital gains taxes vanish, but a portion of the funds can also support a nonprofit of the entrepreneur's choice, combining personal goals with tax advantages.

Qualifying for Qualified Small Business Stock (QSBS)

Entrepreneurs should explore the potential of QSBS, a powerful tool that offers capital gains tax exemptions on profits up to $10 million. By meeting specific criteria, contractors can leverage QSBS to significantly reduce their tax liability after a business sale.

Freeze the Value of Your Business for Estate Tax Planning:

Entrepreneurs can proactively manage estate tax implications by freezing the value of their businesses. This strategy ensures that any appreciation in the business's value between the freeze and eventual sale remains exempt from estate taxes. It's a powerful tool for those aiming to pass on wealth without triggering substantial tax liabilities.

Working with High-Quality Tax Professionals: 

Entrepreneurs should recognize the importance of collaborating with knowledgeable and capable tax professionals. These professionals, including lawyers, accountants, and wealth managers, play a pivotal role in designing and implementing legal tax mitigation strategies. Transparency is key—legitimate tax strategies are well-defined in the tax code, and any claims of proprietary secrets should be met with caution. The best advice is to pursue tax optimization within the bounds of the law, avoiding both tax evasion strategies and those who promote them.

Minimizing tax liability is a legitimate and encouraged pursuit for entrepreneurs. By understanding and implementing legal tax avoidance strategies, entrepreneurs can optimize their financial positions while contributing to social goals promoted by the government. Stay on the right side of the law, work with reputable professionals, and navigate the complex tax landscape with confidence and integrity.

Jamie Waldren, private wealth advisor and founder and CEO of JN Private Wealth Management, an independent boutique virtual-family office and private investment firm, specializing in comprehensive wealth management for CEO founders, entrepreneurs, business owners, executives, and family legacy planning. You can find him via his website: www.jnprivatewealth.com. JN Private Wealth Management does not give tax or legal advice.