An annual plan provides structure and direction for your business and employees. It helps you set goals, track progress, and ensure you are on track to achieve your objectives. It involves looking back at the year that was and then looking ahead to the year that will be, assessing risks and rewards along the way, and articulating milestones and tasks that need to be completed in order to reach success.
While accelerating growth and profitability should always be the primary focus of any annual plan, there is another factor that often gets overlooked: taxes. Tax strategy planning should be an integral part of this annual planning process.
As a business owner, it’s important to understand how taxes impact your business and integrate tax planning into your annual plan.
This is perhaps the only way you can minimize how much you pay in taxes, allowing you to truly come up with a tax-efficient annual plan. This harmonious gel of strategy and tax planning is critical to the success of your business.
How To Align Your Tax Strategy With Annual Planning
Developing a tax strategy should be an ongoing process and should include both proactive and reactive steps.
Proactive steps involve taking full advantage of deductions, credits, and loopholes that can help reduce your taxes. These should be part of your annual plan, as should other steps like maximizing retirement contributions and taking advantage of tax-deferred income strategies. Another important step is to understand the tax implications of any business decisions you make.
Your tax strategy should also include reactive steps, such as being prepared for an audit by making sure you have all the necessary information, documents, and records. It should also include managing and responding to changes in tax code to ensure your tax strategy is up-to-date.
Your annual plan should include a review of your current tax situation and allow you to anticipate any changes that may affect it.
Here are a few steps you can take to align your tax strategy with your annual planning:
1. Review your business’s financial situation
The first step in developing a tax strategy that aligns with your overall annual plan is to review the financial health of your business. Look at sources of income and expenses, as well as possible deductions that can help minimize your tax liability.
You’ll also need a complete evaluation of your business’s overall standing in categories such as assets, liabilities, equity, and cash flow. This is the only way to determine where you need improvement and identify tax-saving opportunities.
2. Understand your tax obligations
When developing a tax strategy, it is important to understand your obligations as a business owner. This includes understanding the filing deadlines and requirements for different state and federal taxes.
- Am I prepared to file taxes on time?
- Have I considered how proposed tax legislation could impact my business?
- Do I have the necessary documentation to support any deductions or credits on my returns?
- Are my tax forms in line with my business structure?
You don’t want to wait until the last minute to find out that you’re not compliant with the law. With the way the tax system is structured, it pays to plan ahead and be aware of any possible changes that could affect your business.
3. Take action when life changes occur
Some life changes may have an impact on your tax strategy and annual plan. Examples include filing status changes, such as marriage or divorce, the birth of a child, or the sale of business assets.
These life changes may require you to reassess your tax situation and make any necessary adjustments to your tax strategy. When planning for the year ahead, be sure to consider these changes and the potential impact they may have on your taxes.
4. Know your deductions and credits
A savvy business owner should never leave a single credit or deduction on the table. Research the different credits and deductions available to your business, and be sure to document all of them. Even better, itemize each one on your tax return to ensure you capture every potential deduction.
Some deductions you might be able to take are:
- Business expenses
- Investment deductions
- Education deductions
- Healthcare deductions
- Using your home for business purposes
- Using your car for business purposes
Here are some credits you might be able to claim:
- Small business health care tax credit
- Child and dependent care credits
- Education credits
- Retirement plan credits
- Energy-efficient home improvement credit
- Income and savings credits
Making the most of deductions and credits can help reduce your overall tax liability. It’s important to note that some deductions and credits have eligibility requirements, so be sure to double-check the details before claiming them on your taxes.
5. Establish your annual tax plan
Once you’ve reviewed your financial situation, researched credits and deductions, and taken into account any life changes that might affect your taxes, you’re ready to create your annual tax plan.
Your plan should include a timeline of when you will complete all necessary tasks and deadlines, such as filing taxes, making estimated tax payments, or setting up a retirement plan.
Your plan should also include an outline of how you will approach tax planning throughout the year. This includes setting goals and developing strategies to optimize deductions, credits, and other money-saving opportunities.
Having a comprehensive annual tax plan in place will help you stay organized and on top of all your tax obligations throughout the year.
Here’s a simple list of what you might need to create a well-thought-out plan:
- Social Security documents
- W-2 and MISC-1099s forms
- Pay stubs
- Expense receipts
- Tax forms that report other types of income, such as for interest and dividends (Schedule B, Form 1040)
- Business income and expenditures (Schedule C, Form 1040)
- Bank statements
- Investment account statements
- Property tax records
- Tax deduction records
- Retirement plan documents
- Health care information
- Any other documents that support your deductions or credits
By taking the necessary steps to create an effective tax plan, you can help ensure that your taxes are filed properly and on time. Plus, you can maximize your deductions and credits to reduce your overall tax liability—giving your business the best chance at success.
6. Factor in depreciation
Depreciation is a multi-year process that aims to reduce the cost of long-term assets over time. When you depreciate an asset, you’re essentially taking a deduction for the cost of that asset each year. This can be especially helpful for businesses with large investments in equipment or property.
Some assets that qualify for depreciation include business vehicles, furniture, fixtures, and investments in rental properties. To maximize your deductions, you’ll need to calculate the cost of depreciation accurately.
Keep in mind that there are some limits on how much you can depreciate. For example, the IRS limits the Section 179 deduction for business-related assets to a maximum deduction of $1,080,000 and a phase-out amount of $2,700,000 for the value of the property purchased in 2020.
By factoring depreciation into your tax plan, you can reduce or defer taxable income and reap the benefits of a lower tax bill.
7. Stay organized and stay informed
Making sure you have all the necessary documents to file your taxes can be a challenge. The key to staying organized and on top of taxes is to keep all tax-related documents in a safe place. This includes everything from your W-2s to receipts for business expenses.
To make it easier, you can use tax preparation software or consult with a professional who’ll help you stay organized and on top of all your tax obligations.
8. Consult with a tax professional
Tax planning is an ongoing process that must be knitted into all aspects of your business.
Unfortunately, when it comes to tax planning, there is no “one size fits all” approach. To ensure that you are taking advantage of all the deductions, credits, and tax-saving opportunities available to you, it is always a wise idea to consult with a knowledgeable tax planning professional.
A good tax strategist such as Phillips Business Group can help determine the expected ROI of tax savings when using various tax strategies and identify the ones that best fit your situation. For instance, if a strategy saves your business $20,000 in tax burden each year for 5 years, the ROI should be $100k. This is a massive return that you likely wouldn’t want to leave on the table. You can reinvest it, pay down debt, or use it to expand your business.
Work With A Trusted Tax Strategy Team To Save More
At Phillips Business Group, our team of tax strategists is committed to helping you make smart choices with your taxes. We specialize in creating custom tax strategies that have helped save our clients up to $97k in overpayments.
Our team is well-versed in the constantly changing tax landscape and we can provide the peace of mind that comes from being able to confidently execute your tax plan.
Talk to us today to learn how our bespoke tax planning services can help you align your tax strategy with annual planning.