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Launching a business. Part one: get all your ducks in a row.

Stephanie Starkey, Partner

August 7, 2017

The idea of leaving steady employment behind in pursuit of starting your own business might be intoxicating, but do your homework first. Ask yourself these basic questions right now:

  • Who is your target client base?
  • How are you going to attract them?
  • Have you already started cultivating potential customer relationships? 

Once you have a handle on where your business will come from, sit down with your accountant or financial advisor. He or she can help you create a business plan that includes sales projection, first-year growth income goals, and expense and revenue forecasts.

Next, plan on employing some or all of the following tax strategies to make your money work as hard as possible, especially during the first couple of years.

1. Hire your kids. According to the IRS, “Payments for the services of a child under age 18 who works for his or her parent in a trade or business are not subject to Social Security and Medicare taxes if the trade or business is a sole proprietorship or a partnership in which each partner is a parent of the child.” However, your child’s work must be “legitimate,” and the salary must be “reasonable.”

2. Max out your retirement contributions. We know that you’ll be tempted to sink every penny into your new business, but you really need to either start saving or keep saving for retirement. Traditional IRAs and 401(k)s are funded with pre-tax dollars that decrease your taxable income. For instance, if you plan on making $50,000 and you contribute $4,000 to an IRA or 401(k), you’ll only pay taxes on $46,000 (not including itemized deductions, of course). Health savings accounts operate on the same principle. 

3. Contribute to charities. You may already be in the habit of donating to worthy causes, but after you’ve launched your new business, charitable contributions can be deducted right off the top of your income. Just make sure the organizations qualify, and get receipts. (Deductions for contributions to a qualified organization are generally limited to 50 percent of adjusted gross income, but in some cases, 20- and 30-percent limits may apply).

4. Accelerate depreciation. Many business assets, including buildings, cars, furniture, equipment, and software, are depreciable and, therefore, tax deductible. However, each asset’s value and tax benefit is spread out over time. In order to get the greatest deduction sooner rather than later, you may want to undergo a “cost-segregation study” to determine an accelerated depreciation schedule. 

5. Defer a portion of compensation. It’s much more important to max out your retirement contributions first, but you may want to put extra income into a cash balance or a defined benefit plan that allows your earnings to grow tax-deferred until withdrawal.

Starting a business is exciting and scary at the same time. There’s always some risk in going out on your own, but 4Wealth is here to advise and work with you along the way. Please don’t hesitate to call us for any accounting, insurance, investment, or retirement question you may have.

In part two of this series, we’ll talk about the differences between sole proprietor and S corp classifications.

About Stephanie: Having joined 4Wealth® Financial Group almost five years ago and recently promoted to Partner, Stephanie enjoys helping young entrepreneurs explore the tax advantages of S-corporations and designing pension plans that help clients prepare for the future. Stephanie can be found at LinkedIn, Twitter, Facebook, email, and (708) 695‐5862.

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