Small-Business Owners, Here's What You Need to Do to Reduce Your Taxes During Biden's Presidency Proactive tax planning will be the key to saving thousands in the coming year.

By Tom Wheelwright

Opinions expressed by Entrepreneur contributors are their own.

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Joe Biden will likely begin working on his promise to raise taxes in his first 100 days. So how can you plan now to reduce or avoid the proposed tax increases? Biden promised to avoid tax increases on anyone with less than $400,000 of income, so that amount becomes your new goal for taxable income when investing and tax planning, regardless of your actual income or cash flow.

Set up your business as an S corporation

First, never ever use a Schedule C to report your business income. Instead, form your business as an S corporation. You can either form it as a limited liability company (LLC) and elect to tax it as an S corporation on form 2553 or you can form as a corporation as use the same form 2553 to elect S corporation status.

When you form an S corp, these now fall under business expenses: car payments, home office expenses, 50% of meals, travel and continuing education tuition.

Don't forget that Biden also wants to increase social security taxes on all income over $400,000. When your company is an S corporation, you only pay social security tax on your salary. Unlike a Schedule C or partnership, you don't pay social security taxes on your distributions. The key is to pay yourself a reasonable salary. What is reasonable? According to the IRS, a reasonable salary is what you would pay someone else to do your job. Remember, as a business owner, you really have two roles. One, as the leader of the business (e.g., CEO or President) and two, as the owner. Only pay yourself enough to compensate you for being the leader of the business. Typically, this should not be more than 50% of the total amount you take out of your business.

Related: How Will the Biden Tax Plan Affect Your Small Business?

Some people seem to think an S corporation requires a lot of work. Consider this fact, if your net income from the business is $800,000, under the Biden tax plan, you would pay $63,467 less each year in social security taxes by forming your business as an S corporation and paying yourself a salary of $200,000. You may be able to justify an even lower salary, which would only increase your tax savings. By the way, in this scenario, even under the current tax regime, you would lower your social security taxes by more than $23,000 by forming your business as an S corporation.

Consider reinvesting in your business or other tax-incentivized activities

Remember that the tax law is basically a series of incentives, primarily for business and investing. Any money you reinvest in your business is deductible and therefore not taxable. If your net income is $800,000 from your business and you reinvest $400,000 back into your business, your taxable income from the business will be reduced to $400,000. This takes you back down to $400,000 of net income. Now, in addition to reducing your taxable income to $400,000, you should also receive full benefit of the Qualified Business Income Deduction (QBID).

Biden has suggested that businesses with income over $400,000 would lose the QBID. The amount of the QBID, in this case, would be as high as $80,000, or 20% of taxable income. This means you would only be taxed on $320,000, as substantial tax savings from your original tax liability on $800,000.

Related: Trump Hits Biden on Raising the Minimum Wage

Business is only one tax-favored investment. Currently, real estate and natural resources are also highly-favored investments, effectively allowing 100% deduction for every dollar invested. Biden has suggested both investment preferences will be reduced or eliminated. Instead, the most favored investment will be clean energy.

All this means is that investors who don't or can't reinvest all their excess earnings back into their business should consider realigning their investment strategy to include clean energy investments. How to do this will depend on how Biden actually changes the tax laws. This brings us to our third recommendation.

Develop a comprehensive tax strategy with a good CPA

Every business owner will have different objectives for both their business and their investing. That's why having a strong CPA on your team who has a system for developing tax strategies, and who stays on top of tax law changes is critical to your success. Take the time now, before the end of 2020, to develop your tax and wealth/investment strategy. Then, when the tax laws change, you will be prepared.

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Tom Wheelwright

Entrepreneur Leadership Network Contributor

CPA, Author and Founder and CEO of WealthAbility

Tom Wheelwright is a leading tax and wealth expert, CPA and author of "Tax-Free Wealth." As the CEO of WealthAbility®, Wheelwright helps entrepreneurs and investors build wealth through practical strategies that permanently reduce taxes.

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