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Tax season can be stressful, but if you fold tax planning into your business strategy, the tax process becomes quicker and easier.
Tax season is a grueling time for many small businesses. It’s often associated with the stress of combing through budgets and spreadsheets and working long nights to account for every penny. However, you can prevent tax-season headaches by thinking about your taxes year-round and preparing for tax season long before it’s time to file.
By folding tax planning into your overall business strategy, you can avoid falling behind on your taxes, tackle them far more effectively and maximize your deductions. This is known as strategic tax planning.
Strategic tax planning is when a business creates a plan to minimize the amount of taxes it pays in a given period. You should start planning formal tax-strategy sessions in the middle of each tax year to give yourself ample time to create and apply your strategies before key tax deadlines.
Every entrepreneur should have a basic understanding of the provisions of the tax code and work with a certified public accountant (CPA) when possible to implement the correct individualized strategy. Below, we share tips for ensuring you have the best business tax-planning strategy year-round. But first, you should understand the benefits of doing so.
Strategic tax planning sets up small business owners for success, putting them in the best possible position for growth. Here are some of the key benefits of thinking about your taxes year-round.
It’s essential for small businesses to create a tax plan to mitigate their liabilities, especially when these transactions are taxed. By giving yourself time to prepare for your taxes, you can reap these benefits:
According to Anthony Mezzasalma, a CPA and partner at Mezzasalma Advisors, one example of poor tax planning would be to take in a large amount of revenue before the end of the year that could potentially move your business into the next tax bracket.
Instead of paying more taxes because of that revenue, good tax planning would have your business receive that money at the start of the new year to mitigate your liabilities. If delaying revenue isn’t an option, consider spending some of that money on business expenses.
“[Say] a client comes to me in December, and they’re like, ‘I landed a big client, and it’s looking like I have more income [this year]. What can we do about it?’” Mezzasalma told us. “If it’s December before [the] end of year … maybe you accelerate your expenses and buy that piece of equipment you were thinking about buying, or you defer some revenue. There’s less you can do after the fact.”
Maintaining a strategic tax plan helps you stay updated on tax law changes. Since the pandemic and its subsequent effects on the economy, deadlines and tax requirements for small businesses have been changing constantly. Having a tax plan helps you understand what has changed and lets you reassess your strategy accordingly.
With a clear understanding of current tax laws, you won’t risk noncompliance with new or updated regulations, and you’ll minimize the number of errors on your tax return. In turn, you won’t have to worry as much about facing an audited return or owing more money down the line.
Proactive tax planning throughout the fiscal year can help you avoid stress and minimize potential errors during tax-filing season. By consistently maintaining organized financial records, meticulously categorizing business expenses and adhering to a regular bookkeeping schedule year-round, owners can alleviate the last-minute burden of reconciling disorganized data.
This systematic approach not only fosters a sense of control over the tax-filing process but also reduces the likelihood of costly errors or penalties arising from hurried data entry or overlooked deductions.
Speaking of deductions, adopting a year-round approach to tax considerations helps small business owners maximize their deductions. By maintaining consistent awareness of regulations and requirements, business owners can strategically plan their expenses to capitalize on available deductions throughout the year. This proactive mindset allows for thorough documentation and categorization of deductible expenses, thereby ensuring that no legitimate deductions are overlooked or missed.
Additionally, staying up to date with evolving policies enables business owners to leverage timely deductions, such as those related to equipment purchases, office supplies, professional fees, business travel or charitable contributions.
A solid tax-planning strategy gives you a better understanding of your business’s financial health so you can make sound financial projections and investments throughout the year. Additionally, it helps you become more familiar with the ebb and flow of your business’s operations.
With proper tax planning, you can capitalize on any deductions you might be eligible for so you can save money and further fund your company’s future.
Here are some of the ways businesses can ensure they stay on top of taxes all year long.
One of the best ways to stay on top of your taxes is to use business accounting software. Here are a few of our picks for the best accounting software for business owners.
Automating your accounting tasks with high-quality software and having all of your financial documents in one place can be helpful come tax season. By investing in accounting software, you won’t have to worry about untracked expenses or missing documents.
Aim to track all of your spending throughout the year so none of your fixed and variable expenses are hard to pin down once tax season rolls around. Noting expenses when they happen ensures you don’t forget them at the end of the year.
“If you’re staying on top of things during the year, you can more easily identify and act on opportunities that you can’t otherwise act on after the year’s over,” Mezzasalma said. “By keeping your books up to date, you can realize how well you’re doing that year and react accordingly.”
For some businesses, it helps to have monthly expense and budget-planning check-ins. For others, it’s best to go through business spending every week. Whatever the time frame, get on a schedule to track your business’s spending habits consistently. You can also use an app to track your spending. If you don’t track your spending and expenses and you end up making mistakes on your return, you could be hit with fines later, or you may lose sight of possible deductions that would have helped when you were filing your taxes.
Regardless of whether you’ve been tracking your spending regularly, ensure that you always separate business expenses from personal expenses to avoid confusion. If you haven’t done so already, set up a separate bank account for your small business and make company purchases using your business credit card. [Learn how to apply and qualify for a business credit card.]
Stay aware of crucial deadlines throughout the year to hold yourself accountable. Note all tax deadlines, and don’t be afraid to set deadlines for yourself. If you want to have monthly or quarterly expense check-ins, keep those on a calendar, and set deadlines for tracking your expenses in conjunction with your check-ins. Keeping important dates and deadlines organized will help you at tax time.
If you find taxes for your small business overwhelming or confusing, or if you just want another resource, consider hiring an accountant or other tax professional to help. Tax professionals are highly knowledgeable and can assist as much or as little as you need. They can also help hold you accountable during the year to maintain smart and legal business tax practices and finances. Additionally, a tax professional can help you stay aware of hidden fees and important documents.
The qualified business income deduction provides pass-through business owners a deduction worth up to 20 percent of their share of a business’s income. However, it involves regulations and limitations.
Pass-through business entities include sole proprietorships, partnerships, limited liability companies (LLCs) and S corporations that are not subject to corporate income tax because their profits flow through to owners, who are then taxed under the individual income tax.
If you own a specified service trade or business (SSTB) and your income exceeds a certain threshold, you’ll lose out on this deduction. An SSTB can be any service-based business, such as a law firm, medical facility, accounting firm or investment firm.
Awarding employee bonuses is an excellent way to motivate and incentivize your employees to work harder, and it’s also tax-deductible for your business. The IRS requires you to finalize bonuses by the end of the year and pay the bonuses within two and a half months of the end of the year. You also must pay the bonus directly to the employee, not to a sole proprietor or LLC, so the bonus remains tax-deductible.
Similarly, you can reduce your business’s taxable income by setting up one of the best retirement plans for your employees. If your business starts a 401(k) plan for an employee before the end of the tax year, you can deduct the contributions made to the plan.
Skye Schooley and Andrew Martins contributed to this article. The source interview was conducted for a previous version of this article.