Tax season is a rough time of year for many small business owners. They have to go through budgets and spreadsheets to make sure their financial information is in order, which may mean many sleepless nights.
You can prevent headaches and hassles around tax season by thinking about your taxes strategically and preparing for the tax season throughout the year. Tax planning should be part of your regular business strategy and tasks to avoid falling behind and approach your taxes much more effectively.
What Is Strategic Tax Planning?
Tax planning is an analysis of a financial situation or plans to ensure that every element works together to pay the lowest tax amount possible. This means you’re tax efficient and reduce your tax liability.
Strategic tax planning is an approach to tax planning that involves a plan to reduce the amount of taxes paid within a certain period of time. It’s important to plan tax strategy in the middle of the year to have time to create and execute strategies.
Benefits of Strategic Tax Planning
There are many benefits to strategic tax planning, including:
Mitigate Liabilities
Your tax plan should always be focused on mitigating liabilities, which takes time to prepare for your taxes. When you have ample time, you can avoid common mistakes, reduce payable taxes by deducting your expenses from your income, and have control over when you pay.
For example, you could have a lot of revenue running into the end of the year that could push you into the next tax bracket. If you have tax planning in place, you could push that revenue to the beginning of the new year or spend it strategically on business expenses.
Stay Current on Tax Laws
Having a tax plan helps you stay current on the tax law changes. A lot has changed during the pandemic, so the deadlines and tax requirements for small businesses may be difficult to keep up with without a plan to assess your strategy.
With your clear understanding of tax laws, you’re at a lower risk of noncompliance with regulations that are new or updated. You won’t have as many errors on your return, meaning you may not have to worry as much about an audit or higher tax bills.
Understand Your Financial Health
When you have financial visibility, you have a clear picture of your business’s financial health to make smart decisions about investments and spending. You’ll also get an idea of how your business ebbs and flows throughout the year.
When you know what you’re spending, you can plan for deductions and save money, which can then go right back into your business to fuel its growth and profitability.
Tax Planning Strategies
Here are some strategies to make taxes a priority for your small business.
Track Spending and Do Budget Check-Ins
It’s important to track your spending throughout the year to stay on top of fixed and variable expenses. If you wait until the end of the season, it’s much more difficult to track them accurately for tax time, but noting them as they occur means you won’t forget.
Budget planning check-ins are a great way to approach this. You can get on a schedule to track spending habits, or simply use an app to track spending. This way, you have a clear view of your spending -- and possible deductions – when you file.
Keep Business and Personal Money Separate
Whether you’re tracking your spending or not, it’s vital that you keep your business expenses separate from personal expenses. If you don’t already have separate bank accounts for your business and personal use, the first step is setting those up. You should consider getting a business credit card as well.
Stay on Top of Deadlines
There are crucial tax deadlines throughout the year that you need to pay attention to. Set up deadlines for yourself with notifications, whether on your calendar or your phone, to ensure you’re prepared for upcoming deadlines.
For monthly or quarterly expense check-ins, those should be on the calendar, and set deadlines for tracking your expenses. Having these deadlines organized will pay off when tax time rolls around.
Use the Qualified Business Income Deduction
The qualified business income deduction offers a deduction worth up to 20% of the share of the business income for pass-through business owners. There are regulations and limitations, however.
What are pass-through business entities? These include sole proprietorships, limited liability companies (LLCs), and S corporations that have profits flowing through to the owners to be taxed under individual income tax.
Include Employee Bonuses and Retirement
Employee bonuses are a popular way to incentivize your employees, but it has another benefit – it’s tax-deductible for your business. The IRS requires that businesses finalize any bonuses by the end of the year and pay them within a few months.
In addition, setting up a retirement plan for employees can reduce your taxable income. For example, with a 401(k) for employees, you can deduct the contributions you make to that plan before the end of the year.
Invest in Tax Software
Tax software is a cost-effective investment for your business taxes. You can automate your accounting tasks and keep all your documents in one place, which is the type of organization you need for tax season.
With predictive accounting software, you can manage your taxes year-round to claim deductions, report your income and expenses, pay your tax estimates, and report major events at the time they occur, instead of trying to think of them at the end of the year. When filing season comes, you will be ready to meet the deadline and avoid a huge tax bill.
Prepare for Tax Season
No one wants to be scrambling come tax time. Business taxes are more complicated than personal income tax, but the best way to be in a strong position come filing time is by preparing for them all year. You’ll not only have less stress, but you’ll have a clearer view of your business’s financial health and future.
Author Bio:
Name: Shahar Plinner
Shahar is a tax and accounting expert with over 20 years of experience in the field. He is an entrepreneur and known as The Tax Guru on the west coast. Shahar moved to Seattle from Israel and founded, scaled, and sold a leading tax and accounting firm in the Seattle Metro area. Over the years, he served thousands of business owners and perfected the playbook for self-employed tax strategy. That’s why he founded Formations, to make sure the self-employed never overpay on taxes again.
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