When talking with chiropractors and other business owners, I often hear similar pain points regarding finances. Whether it be the ups and downs of cash flow, managing overhead, managing staff, or the myriad of other practice challenges we all have faced, there is no shortage of financial topics to ponder and plan for.
My team is commonly asked questions like, “How do I consistently save and invest for the future with the overhead I have?” “If I’m making a good income, how do I avoid paying 30%, 40%, or more in taxes to the state and federal government?” “How do I reward my employees and keep them financially motivated to stick with me?”
While there are many topics to address with the above questions, let’s start with how to maximize tax efficiency and retirement planning from a corporation standpoint. Admittedly not as exciting of a conversation as discussing Bitcoin or diving into real-estate investing, the corporate structure of your business(es) is vitally important. Let’s talk about leveraging your S Corp as a chiropractic business owner. If properly planned for, your future (retired) self will thank you!
Take Advantage of the S Corp
One powerful tool at your disposal is the S Corporation (S Corp) structure, which offers a range of strategic benefits when utilized effectively. By understanding the IRS regulations and accounting principles, you can optimize your S Corp to enhance tax efficiency and build a solid foundation for retirement planning.
Most business owners operate as an S Corp, LLC, or sole proprietor. Unlike traditional C Corporations, S Corps pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. This pass-through taxation structure can result in substantial savings by avoiding double taxation at both the corporate and individual levels.
For chiropractic business owners, this means potentially reducing self-employment taxes by allocating income as distributions, rather than salary, subject to reasonable compensation rules – i.e., you cannot substantially underpay yourself, as this will be a red flag. Additionally, S Corps offer flexibility in structuring retirement plans and implementing tax-saving strategies not available to sole proprietorships or partnerships.
Strategic Retirement Planning With an S Corp: Five Strategies
One of the primary benefits of an S Corp is its ability to facilitate strategic retirement planning for business owners to maximize your retirement nest egg. Here are several strategies to consider:
1. Establish a Solo 401(k) Plan: If you are a chiropractic business owner with no full-time employees (other than your spouse, if applicable), you may be eligible to establish a solo 401(k) plan. This allows you to contribute both as an employer and an employee, potentially deferring significant amounts of income on a tax-deferred basis. As always, consult with your accountant and financial planner while exploring this strategy.
2. Utilize Profit-Sharing Contributions: S Corps can allocate a portion of their profits to employee retirement accounts through profit-sharing contributions. By implementing a profit-sharing plan, you can enhance employee benefits while reducing taxable income for the business.
You’ll need to adhere to IRS guidelines regarding contribution limits and nondiscrimination testing to ensure compliance. The dollar amounts allowed by the IRS change annually, so consult your financial team for the newest numbers and rules.
3. Implement a Defined Benefit Plan or a Defined Contribution Plan: While these options may sound complex, these plans may offer significant advantages for maximizing retirement savings and utilizing tax deductions, and can be easily set up.
These plans allow for substantial annual contributions, providing a retirement income stream based on factors such as age, compensation, and years of service.
4. Explore Roth Conversion Strategies: The Roth conversion is one of the best tools currently available. Depending on your individual circumstances and tax outlook, consider converting traditional retirement account balances to Roth accounts.
Roth conversions can provide tax-free growth and distributions in retirement, offering valuable flexibility and diversification within your overall retirement portfolio.
This must be done very strategically with the help of a financial advisor, as the conversion will trigger income tax in the year that it is completed. While this can be painful, the advantage is greater, as the dollars will grow tax free – forever.
5. Optimize Income Allocation: Strategically allocating taxable income between salary and distributions can help minimize self-employment taxes and maximize retirement contributions.
While maintaining compliance with IRS guidelines and reasonable compensation requirements is essential, working closely with a knowledgeable tax advisor can help identify opportunities for tax optimization and long-term financial planning.
Navigating Compliance & Regulation
Accurate record-keeping, timely filings, and proper documentation are essential to mitigate the risk of audits or penalties. Additionally, staying informed about changes to tax laws and regulations can help you adapt your strategies proactively and maintain compliance with evolving requirements.
Be sure your business attorney and accountant are aware of your goals and agree with any strategies you propose. Your business attorney can add the annual meeting notes and additions to your corporate record book in case of any audits or issues.
Take-Home Points
Leveraging your S Corp as a chiropractic business owner for retirement and tax planning requires a strategic and proactive approach. By understanding the advantages of the S Corp structure, you can optimize your financial position and build a secure foundation for retirement.
Consult with qualified professionals like tax advisors, financial planners, and legal experts to develop a comprehensive plan tailored to your unique needs and objectives. With careful planning and execution, you can unlock the full potential of your S Corp for amazing, long-term financial success.
Disclaimer: The Wealth Group is a Securities and Exchange Registered Investment Advisor. No content contained herein should be construed as an offer for investment advice or an offer for the purchase or sale of any security, insurance or other investment product. Investments involve the risk of loss, including loss of principal. Please consult with a qualified financial, tax or legal professional before implementing any strategy presented here. Data presented here is obtained from believed reliable sources, but cannot be guaranteed as to completeness or accuracy.
