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Practical Planning Tip: Year-end Planning for Business Owners

December 19, 2023

Today’s year-end planning tip will cover the topic of Planning for business owners.

Transforming net operating losses or NOLs into tax-free income with a Roth IRA conversion: Business owners who will record a net operating loss this year may be able to use it to their advantage. Unlike net capital losses, where taxpayers are limited to using only $3,000 annually to offset ordinary income, taxpayers can generally apply NOLs against 80% of taxable income. Clients carrying forward large NOLs can use those losses to offset the additional income from a Roth IRA conversion. The rules on calculating and utilizing NOLs are complicated, so it is critical for folks to consult with a tax professional. It’s worth noting that more information on NOLs can be found within IRS publication 536.

Planning tip: The Tax Cuts and Jobs Act created a new tax deduction for business owners known as the qualified business income, or QBI, deduction. It permits certain pass-through entities like sole proprietors, partnerships, and S corporation owners, to deduct up to 20% of their business income, subject to certain income thresholds and other limits. This deduction is also slated to sunset at the end of 2025. As a result, accelerating income to obtain the 20% deduction may provide significant tax benefits for business owners who qualify for this exemption.

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