I was a chiropractic business owner for 22 years. Not one year passed without talking to my accountant ad nauseum to make sure I was only paying the taxes I truly owed. I’m sure he got sick of my phone calls and emails! Most of the time, this panic and flurry of activity toward the end of the year was a reactive approach based on the profit or loss of the practice that year.
As I’ve learned, being proactive vs. reactive with tax planning will have a tremendous impact on profitability and long-term wealth creation. Keep in mind, I am not a CPA and I am not giving tax advice. Rather, I’m passing on information that I learned as a practice owner and now implement in my financial planning practice.
While not an exhaustive list by any means, here are a few items to contemplate in 2025 as you watch the dollars in your practice.
1. Strategic Debt Management
Debt may be a necessary component of many small businesses, especially in the early years, but managing it carefully with wise counsel and oversight is key to financial health. Based on my experience, over-leveraging, while easy in the short term, rarely works out well in the long term. Even if all debt payments are eventually satisfied, the opportunity cost of keeping those dollars locked up can be significant.
For instance, if you are paying $3,000 a month toward debt at 8% interest instead of investing that same dollar amount, over 10 years, you’ve given up $192,497.03 in profit and growth. If you let that $192,497.30 just sit there and do nothing with zero monthly additions for another 10 years at the same 8% growth rate, you’ve given up another $234,777.12.
The $3,000 “manageable and comfortable” payment for 10 years potentially could cost you over $400,000 in wealth creation over a 20-year span! Imagine if you have $10,000-$15,000 or more in debt payments per month, as I did at one point! Depressing to think of how much more wealth I’d have if I had been a little more cautious with debt.
Lessons I’ve learned: Be careful and patient when taking on debt. The borrower is always slave to the lender, and even if the debt is necessary, just be sure to count the opportunity cost as a real cost!
2. Understand Write-Offs for Large Purchases
When purchasing vehicles or equipment as a strategy to lower your tax burden, it’s tempting to take advantage of the 100% tax write-off allowed under Section 179. However, keep in mind:
- No Future Write-Offs: Once you’ve claimed the full write-off, you lose the ability to deduct ongoing payments for that now-depreciating item.
- Strategic Purchases: Buy equipment only if it’s essential to your operations and supports the potential growth of the practice. Paying in cash for items you genuinely need helps to avoid unnecessary debt and equipment that may just sit around.
Also keep in mind that if/when you go to sell your business (which includes the equipment you’ve written off), you’ll have depreciation recapture that will count as ordinary income. There is no free lunch unless you fully depreciate and keep the item past its full five, seven or 27.5-year cycle.
3. Leveraging Pass-Through Entities
If your business operates as a pass-through entity (such as an LLC, S-Corp, or partnership), profits and losses flow through to your personal tax return. Here are some tips:
Optimize Salary and Distributions: In an S-Corp, paying yourself a reasonable salary and taking distributions can lower self-employment taxes, as distributions are not subject to Social Security and Medicare taxes (FICA), and distributions may not be subject to certain state income taxes (unlike salary).
Flexibility in Payments: Distributions can be taken irregularly or based on business cash flow, offering more financial flexibility than a regular payroll schedule.
Reduced Unemployment Tax: Distributions are not subject to federal or state unemployment taxes, unlike wages.
Salary Considerations: Be sure to pay yourself a reasonable salary to avoid any red flags.
4. Build a Profit-Sharing Model
While paying your team more may not sound terribly attractive at first, introducing a structured profit-sharing plan for employees can be a game changer for your business:
Lower Cash Flow for Higher Returns: While profit sharing reduces your immediate cash flow and income, the long-term benefits can be significant. Keeping employees financially motivated in the long term by the success of the practice and satisfaction of the clients can certainly outweigh the short-term costs.
5. Retirement Planning Options
As a small-business owner, you have several retirement savings options available to you that offer tax advantages and long-term financial security. Here’s a breakdown of a few common choices:
Solo 401(k): Ideal for solo practitioners or owner-only businesses. In 2025, contribution limits are:
$23,500 as an employee contribution (with an additional $7,500 if you are age 50-59, and an additional $11,250 if you are age 60-63).
Additional employer contributions up to 25% of compensation, with a total combined limit of $70,000 (or $77,500 for those age 50-59, and $81,250 for those age 60-63).
SEP IRA: Simple and effective for small businesses without full-time employees. Contributions are limited to 25% of compensation or $70,000 in 2025, whichever is less. SEP IRAs are easy to set up and maintain.
Defined Contribution and Benefit Plans: For highly profitable practices, these plans allow much higher contribution limits and greater tax deferral opportunities. Examples include cash balance plans or traditional defined benefit plans. While these require significant funding commitments, they’re powerful tools for wealth accumulation and tax savings.
Also be aware of Roth IRA conversion strategies in lower-income years, allowing for tax-free growth and withdrawals.
Final Thoughts
Strategic tax and wealth planning isn’t just about reducing this year’s tax liability – it’s about positioning your business for sustainable success and long-term wealth creation. By managing debt carefully, investing in your team, and leveraging tax-advantaged retirement plans, you can work toward long-term financial stability and work-optional status.
Start implementing these strategies and work closely with your financial advisor to tailor them to your unique business needs. The benefits of a thoughtful approach to tax and profit planning will pay dividends for years to come.
Stay tuned for the next article on exactly how a 401K, SEP IRA, Roth IRA, investment account, or other investment/retirement vehicle works and how you can use them for long-term wealth and financial independence.
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.
