Many small business owners dread year-end tax planning. The process usually involves complex paperwork and navigating changes that slip under the radar. However, I believe business owners should view tax planning as a fantastic opportunity.
Tax planning helps you make better business decisions for your small company. As a small business consultant, I have some experience with effective tax preparation strategies focused on growth. Explore the tips I’ve outlined below.
#1. Understand Your Obligations and Requirements
When preparing your taxes, you want to make sure you have a thorough understanding of what taxes you owe and what you need to do to stay compliant with current regulations. For example, consider the type of business you run. A sole proprietorship, for example, requires the owner to file business taxes on their personal tax return; a corporation, on the other hand, would be its own taxable entity. You would want to look up tax regulations for the sort of business you run to ensure you’re filing properly.
You should also review any major changes influencing your tax bracket. Some changes business owners encounter include:
- Shifts in required tax forms
- Enacted or changed laws influencing various business entities and their taxes
- New deductions
Regulations surrounding taxes can change each year. Staying aware of these changes and handling them accordingly prevents unpleasant surprises, allowing you to take advantage of any profitable breaks.
#2. Separate Business Finances From Personal Ones
If you haven’t already, make a habit of keeping your personal expenditures separate from your business expenditures. This practice prevents complications in the future. However, some business owners fail to balance their personal and business finances accordingly.
If you struggle with this, create a business debit account completely separate from your personal one. This practice benefits you even if your operation is new and, therefore, small. You can more easily access itemized expenditures and input them into your records as needed.
Keeping all business finances separate from personal ones from the start greatly streamlines your tax plans. Plus, some banks offer monetary perks for individuals opening business accounts that meet certain qualifications. You should also avoid using your business card for personal expenses, even when it seems more convenient at the moment.
#3. Maintain Accurate Records
Solid recordkeeping practices are essential to running a successful business. They also protect you from audits, missed tax deductions, and other financial complications. You can implement good recordkeeping practices using the tips listed below:
- Purchase financial software that integrates. You can shop various software products to find the perfect fit for your business. Many software products record and update information automatically.
- Set aside dedicated time each month to check your records and balance the books.
- Document and store all receipts related to business-related purchases.
These habits will vastly improve your planning experience and ensure you get the most out of your tax plans.
#4. Use Credits and Deductions to Your Advantage
As a small business consultant, I cannot stress the importance of knowing and using applicable deductions enough. Discover a few that may make your tax plan more flexible:
- Donate to charities that align with your business’s values. Charitable contributions enrich your community and beyond, but you can also write them off on your taxes for a deduction.
- List all business expenditures that apply to the current financial quarter. You might feel tempted to let inexpensive expenditures slide, but each business expense adds up to bigger deductions. Meticulously record and report all expenditures, no matter how small.
- Deduct bad debts when needed. You may have provided a service for which the customer never paid. If you can’t collect the money and have proof, you can write it off as bad debt. The IRS provides deductions for bad debt.
- Contribute to a group retirement plan. When small businesses contribute a certain percentage to their staff retirement funds, they could receive generous tax deductions, depending on their locations. Plus, you’ll retain long-standing employees more easily with one.
- Record old or expired inventory items. You may not directly profit off of all items in your inventory. However, you can still receive a tax deduction. Find and record evidence of any inventory you can’t sell and use it for your tax filings.
#5. Prevent and Respond to Tax Audits
Even people who keep immaculate financial records could still undergo a tax audit. If this happens to you, don’t wait to address the audits. Use the following guide to inform your response:
- Mail audits: Read the audit request and send any items listed in the letter to the IRS as soon as possible.
- Field audits: Consider any possible discrepancies and locate evidence that protects you and your business. Prepare for the audit in advance.
- Hiring tax professionals: Consider employing professional tax services before your audit. Tax professionals can help you navigate the situation.
- Answering IRS questions: Preemptively draft and practice responses to all questions asked by an IRS agent.
- Document provision: Most audit requests will inform you about the IRS’s concerns and what their agent will investigate. You can place pertinent documents and records in a secure folder to speed up the process.
- Appeals: If you have any issues regarding the IRS’s final decision, alert your tax professional. Proceed with appeals following their advice.
Audits rarely happen. Consistent, detailed record-keeping prevents them from occurring. But in the event you receive an audit notice, professional assistance and prompt action will greatly help your case.
#6. Regularly Check for Changes to Laws and Regulations
Could you miss a new deduction opportunity? What about changes to pertinent laws? Use your business network and news updates to stay informed about changes to the tax structure and financial laws that apply to small businesses. Know how new laws and regulations could affect your tax bracket, entity type, and other identifiers.
#7. Create a Filing and Payment Schedule
Organization is essential to areas of your business. Your financial software may streamline several areas of your tax system. But you must further develop a filing system that explicitly labels and separates certain documents. You can improve your system with the following:
- Have at least two digital copies of all documents. Digital copies reign supreme. You can access them from most devices. If you receive physical copies of contracts, invoices, or receipts, promptly scan and store them on your cloud and computer system.
- Backup personal data to a secure cloud system. Simplify and secure tax record maintenance with a secure cloud system. Physical copies can disappear. Fires and natural disasters could destroy computer systems. But you can always access your cloud system and all its contents.
- Train your employees on good record-keeping practices. Help your staff understand how to keep records and the importance of record keeping — especially pertaining to financial documents. Strong tax planning begins with you, the business owner.
- Create a financial calendar with tax deadlines before official ones. Each financial quarter has a mandated filing deadline. Set separate deadlines for your business occurring before the mandated ones. If you encounter any setbacks, you’ll still file on time.
#8. Use Resources Like Tax Professionals
We touched briefly on a tax professional’s role during an audit situation. But tax experts prove essential beyond IRS audits. They keep up with pertinent filing changes and potential deductions that you could miss.
Additionally, they’ll help you maintain your financial records and advise you on ways to improve your record-keeping practices and systems. At the very least, you could receive higher returns since your professional looks through every detail you submit. They know the terminology and regulations that apply to your small business.
#9. Quickly Eliminate Any Tax Issues
Both audits and money owed can create issues for your business in the next financial year. Tackle audits with your tax service immediately after receiving notifications. If you owe money on your taxes, develop a payment plan by the IRS to eradicate the tax debt quickly. Your business can then move on to better things.
#10. Use the Year’s End
Finally, the final financial quarter offers an excellent opportunity for business owners to act on growth plans. Many company owners use this time to invest in and improve their businesses while receiving deductions. Take advantage of this opportunity by:
- Investing in your marketing strategy for the following year. You can start planning your marketing approach. Purchase materials and marketing services according to your plans and budget.
- Purchasing any new equipment your business needs. Have any tools or equipment fallen into disrepair? Schedule repair services and purchase new office equipment. You can write these expenses off on your year-end taxes.
- Making payroll plans. Do you see your business growing next year? Consider hiring new staff members to carry your business through the growth.
Need a Small Business Consultant To Navigate Tax Season? Reach Out!
Hiring a small business consultant is an excellent year-end investment. As a small business consultant, I can develop powerful networking and sales strategies tailored to your business. Call Susan Giddings Consulting at 561-933-7163 for a consultation.
