Many individuals wouldn’t consider tax increases as part of a business’s financial plan, but in the Golden State, it’s become a given. Every state has different tax obligations, but California’s tax laws are some of the most oppressive in the country, and you might need help navigating the changes. Here are some ways you can help your business adapt more to California’s tax increases.
1. Get Deductions on Taxable Expenses
One of the best strategies to reduce your business taxes is by deducting your business expenses. A large purchase that qualifies as a business expense can be deducted from your annual income.
Corporations in California are subject to a flat tax rate (1) of 8.84% of net taxable income. While businesses can deduct eligible expenses from their net taxable income under this rate, it doesn’t come without restrictions. California limits the ability to claim deductions with an alternative minimum tax (2) of 6.65%.
2. File Your Business As an S Corporation
If you own a business, filing your company as an S corporation has some favorable tax advantages. An S corp is a business entity with a special tax status approved by the IRS. This status allows for smaller S corps to skip out on some business income taxes. In return, the income is passed down to shareholders who pay for that income on their own tax returns.
3. Utilize a 401(k) Retirement Plan
You can bypass some taxes by setting up and maxing out your 401(k). What many business owners don’t know is that they can contribute to their retirement plans, and those same contributions can be deducted from your taxable income. It’s wise to consider other pension plans from your employer and other strategies to make deductions where you can.
4. Relocate Your Business
Although relocating can be a pain, the benefits can outweigh the bad when talking about a place like California. If you don’t want to change how your business is incorporated and deductions aren’t cutting it, you may want to consider relocating your business to a nearby state. By relocating your business, you can reduce state income taxes and how they impact your day-to-day operations.
If you’re near the borders of California, this could be an easy commute, but if not, you could also be paying for relocation costs and other liabilities, so be sure to consult with an advisor to help you plan financially.
Take the Next Step
Tax planning can be difficult to maneuver in California, and every business and owner is unique. It’s important to work with an experienced financial professional to clarify your financial goals and create a plan to help best pursue them. We at Nichols Financial Strategies would love to partner with you. Reach out to us at 559-440-6999 or by email at matt@nfstrategies.com to see how we can help.
About Matt
Matthew Nichols is founder, CEO, and wealth advisor at Nichols Financial Strategies with more than 20 years of experience in the financial industry. He spends his days serving business owners and families, specializing in helping those in the agriculture industry proactively prepare for the unique challenges they face in a rapidly changing economy. Matt is an Accredited Investment Fiduciary® (AIF®) and holds his FINRA Series 7 and 63 securities registrations with LPL Financial and his California State Life & Health Insurance license. He’s also pursuing his ChFC designation and is dedicated to continuing his education and staying abreast of the latest financial trends and strategies. Matt’s mission is to help his clients transfer wealth from one generation to the next and work toward achieving their goals so they can spend more time on what they love most. Matt was born and raised in the California Central Valley and resides in Fresno with his wife, Christy, and their two daughters, Holly and Jillian. He enjoys golf, traveling, skiing, and spending quality time with his family. To learn more about Matt, connect with him on LinkedIn.
DISCLOSURES: The information provided is for general informational purposes only and should not be considered an individualized recommendation of any particular security, strategy or investment product, and should not be construed as investment, legal, or tax advice. The Nichols Financial Strategies makes no warranties with regard to the information or results obtained by third parties and its use and disclaim any liability arising out of, or reliance on the information. These indexes reflect investments for a limited period of time and do not reflect performance in different economic or market cycles and are not intended to reflect the actual outcomes of any client of Nichols Financial Strategies. Past performance does not guarantee future results.
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(1) https://taxfoundation.org/state-corporate-income-tax-rates-brackets-2020/
(2) https://1800accountant.com/blog/california-small-business-tax