Tax planning is a critical yet challenging undertaking for a small business. Most business owners are overwhelmed when they look at the complexity and possible strategies involved.
However, if you’re serious about growing your business, tax planning is a necessity. It not only helps with long-range tax strategy but also makes life easier when tax season rolls around.
The Goal of Tax Planning
An obvious goal is to minimize taxes owed, but tax planning goes beyond paying the lowest possible amount on your next return.
A small business owner needs to understand the company’s financial position and use it to develop an overall financial planning strategy. Tax planning is the part of this exercise and looks at the books and strategies from a tax perspective.
In general, the more money you make, the more taxes you pay. However, there is neither a reason nor an obligation to pay any more tax than you have to.
The goal of tax planning is to formulate an overall approach to your taxes. With a strong tax plan, you will have a guidebook that’s efficient, effective, and aids in decision-making throughout the year, not just tax season.
Benefits of Building a Tax Plan
The benefits of tax planning are greater than just making life easier when you file. They also include:
- Decision-making support.
- Every time you make a financial decision, your plan will guide you towards the tax implications of that choice.
- The big picture view.
- It shows not only how your tax situation affects your business today but also how it’s likely to do so in the future.
- Cash savings and cash flow optimization.
- Every dollar you don’t pay in taxes is a dollar available to drive business success. Tax planning looks at the timing of income and expenditures. It ensures that you’ll be able to meet payroll and other recurring expenses.
And, of course, you’ll be more comfortable and confident when you put those returns in Uncle Sam’s virtual mailbox.
Essentials for a Successful Tax Plan
Tax planning is not just high-level, strategic approaches; there are some practical requirements for creating a tax plan as well, and success will be hard to come by without them.
Good Record Keeping
If you practice good record keeping every day, you’ll see its benefits in the long run.
When it comes to your taxes, holding on to your records is vital. With a solid bookkeeping system, you can keep all of your important information together.
As you go, you should add any tax-related records to your files right away. This will help you avoid scrambling come tax time.
Not only will keeping track of tax-related documents aid you in the long run, tracking all of your financial records properly will avoid many problems as well. Proper record-keeping allows you to stay on top of what dollars are coming in and going out of your business, allowing you to have a pulse on your financial health at all times, which is essential to the tax planning process.
This practice also aids in building a strong budget, another key to a successful tax plan.
Utilize Tax Credits & Deductions
There are hundreds of small business credits and deductions, and unless you keep on top of the latest tax law, you’ll miss some of them. Don’t wait until filing time to look into these benefits. You need to know them in advance so you can have a plan to make everyday financial decisions with deductions and credits in mind.
Remember that limitations apply to which deductions can be claimed by whom and when. In addition to money laid out for business expenses, there are lesser-known tax strategies around factors such as:
- Business corporate structure.
- Captive insurance.
- COVID-related tax credits.
Build a Retirement Plan
You don’t have to recognize all your income and pay taxes on it this year. With a qualified retirement plan, you can assure you’ll have money coming in when you’re no longer working.
You’ll also defer income tax until you withdraw the money, and wealth accumulates faster because there aren’t taxes on the gain each year.
If you have employees, consider an IRA or 401(k) for them as well. Your contributions are a deductible business expense, and a qualified plan is a great perk to help you attract and retain top talent.
Work with an Experienced Accountant to Build Your Tax Plan
Most small business owners have enough to do conducting the short-term and long-term management of their business. They don’t have the bandwidth to keep track of all the latest tax laws and tax strategies available. Good record-keeping, retirement planning, and maximizing credits and deductions are only part of building and executing a successful tax plan.Tiffany Phillips CPA is an experienced accounting partner who specializes in protecting the profits of small businesses with tax planning strategies most CPAs overlook. Learn how Tiffany Phillips can help you create a tax plan that will allow you to keep more money to reinvest in your business. Visit Tiffany Phillips CPA today to start saving.