For the entrepreneur, the key to success is merely the starting point. With increasing income comes a growing need for effective financial planning—especially tax efficiency. Without a well-defined strategy for investments, much of your profit will find itself in the IRS’s coffers.
This blog includes practical, tax-effective investment strategies designed for small business owners and high-income professionals. Whether you’re investing retained profits or spreading wealth, these suggestions will assist you in making better choices and holding onto more money.
ALSO READ: 5 Finance Tips for Early-Stage Entrepreneurs
1. Maximize Tax-Advantaged Retirement Accounts
Begin with the fundamentals: utilize all available tax-favored accounts to minimize taxable income while accumulating wealth.
Key options:
- Solo 401(k): Best for business owners with no staff (other than a spouse). Contributions can be more than $66,000 per year (as of 2023), employer and employee combined
- SEP IRA: Has easier setup and enables contributions up to 25% of compensation (max $66,000)
- Roth IRA or Roth 401(k): Not tax-deductible during contribution, but tax-free withdrawals qualify—very beneficial for long-term flexibility
Tip: Use a financial advisor or accountant to identify the best plan for your cash flow and business structure.
2. Invest in Long-Term Capital Gains
The tax treatment of long-term compared to short-term capital gains can make a big difference in your returns.
What to know:
- Short-term gains (held <1 year) are taxed as ordinary income—usually at higher rates
- Long-term gains (held ≥1 year) are taxed at 0%, 15%, or 20%, depending on your income tax bracket
Strategy: Adopt a buy-and-hold investing approach when possible. Not only does this reduce taxes, but it also promotes portfolio stability.
3. Use Tax-Loss Harvesting to Offset Gains
Tax-loss harvesting involves selling underperforming investments to offset gains elsewhere in your portfolio.
Benefits include:
- Reducing capital gains tax liability
- Offsetting up to $3,000 in ordinary income annually
- Carrying unused losses forward to future years
Tip: Avoid the IRS “wash sale” rule by waiting 30 days before buying the same or virtually identical security.
4. Use Real Estate for Depreciation Benefits
Real estate is a favorite of entrepreneurs because it provides stable returns as well as tax benefits.
How it works:
- Depreciation lets you deduct a portion of a property’s cost over time, lowering your taxable income
- 1031 exchanges allow you to delay capital gains taxes when exchanging one investment property for another
Bonus: Rental income tends to be taxed at a lower effective rate than regular income.
5. Reinvest Using a Tax-Efficient Asset Location Strategy
Where you keep investments is just as important as what you invest in.
Asset placement tips that pay off:
- Keep tax-inefficient assets (e.g., bonds, REITs) in tax-deferred accounts
- Put tax-efficient assets (e.g., index funds, ETFs) in taxable brokerage accounts
- Take advantage of municipal bonds for federal (and even state) tax-free income
6. Collaborate with a Tax Planner Who Knows Entrepreneurs
Tax law changes—and so must your plan. An experienced tax planner can assist:
- Reduce annual bills
- Plan quarterly estimated payments
- Handle business income versus individual investment income
- Discover new credits and deductions
Tip: Select a financial professional with expertise in high-income entrepreneurs and small business owners.
Final Note
Tax efficiency isn’t tax avoidance—it’s timing, structure, and strategy optimization. By structuring your investments in the most tax-efficient manner, you can save huge, reinvest more of your gains, and build wealth for the long run.
Business owners and entrepreneurs who integrate tax planning into their overall investment strategy are more likely to keep capital, grow faster, and enjoy long-term financial freedom.
