There are countless tax planning strategies available to small business owners. Some are aimed at the owner’s individual tax situation and some at the business itself. Regardless of how simple or complex a tax strategy is, they are all designed to accomplish one or more of the following goals:
- Reduce your amount of taxable income
- Lower your tax rate
- Claim available tax credits and deductions
- Control the time when taxes are paid
- Avoid the most common tax planning mistakes
Small business owners should work with an experienced tax advisor and CPA to develop an effective tax planning strategy. These professionals will help you estimate your personal and business income for the next few years. This is necessary because many tax planning strategies will save tax dollars at one income level, but will create larger tax bills at other income levels.
Based on those estimated income projections, these advisors will be able to estimate your tax bracket. If this sounds like a lot of work, it can be. But you should already be projecting your sales revenue, income, and cash flow for general business planning purposes. The better your estimates are, the better your tax planning efforts will succeed.
Suggested Tax Strategies to Consider
As a small business owner, it’s impossible to keep up with every change in tax law. That’s why it’s important to work with a trusted tax advisor and CPA throughout the year to plan for taxes. When you build an ongoing working relationship with someone who understands your business, they’ll be able to help you maximize your revenue and minimize your tax liability.
Here are just a few tax strategies that you might be able to take advantage of:
- Consider a Tax Status Change
As a small business owner, you have several options for structuring your business. You can operate as a sole proprietor, partnership, limited liability company (LLC), S corporation, or C corporation.
The business structure you choose impacts your taxes. If your business has outgrown its current business structure, you may be able to change it to one that is more appropriate for your current situation.
- Defer or Accelerate Income
Many small businesses use the cash method of accounting for their books and tax returns. Under the cash method, a business recognizes income when it’s received and expenses when paid - in other words, when cash actually changes hands.
This method creates the opportunity for tax planning. If you expect to be in a lower tax bracket next year, you might want to defer some income, when you’ll pay taxes at a lower rate.
- Set Up a Retirement Account
Setting up or contributing to an existing retirement account can reduce your taxable income. It must be one that’s recognized by the IRS to allow deferment of taxes on earnings until the earnings are withdrawn.
These accounts include IRAs and defined contribution plans such as a 401(k) plan. If you set up a 401(k) plan before the end of the tax year, you can deduct contributions made to the plan when you file your tax return.
- Take Advantage of Tax Credits
Tax credits can help lower your income which means you will owe less to the IRS. You can get tax credits for going green, hiring employees, and providing disabled employees and the public access to your business, and others.
Most of these credits are part of the General Business Credit, which is extensive, allowing most business owners to take advantage of tax credit opportunities. Small business tax credits can be difficult to parse and challenging to keep track of, but the tax savings are worth the effort.
- Maximize Your Deductions
One of the most common tax mistakes small business owners make is not maximizing their deductions at tax time. As a business owner, you’re entitled to deduct certain expenses, losses, and costs from the amount of taxes you owe.
These deductions can significantly decrease your tax liability and are worth tracking. For every deduction you claim, it’s important to have accurate business records, receipts, and documentation to prove your expenses to the IRS.
Avoid these Tax Filing Mistakes
Part of developing a successful tax planning strategy includes understanding your tax deductions, what taxes are due quarterly, and common filing errors to avoid. Some common problems small business owners make include:
- Failing to Keep Receipts and Accurate Records. Throughout the year you should be keeping a record of every purchase you make for your business. In addition to making sure you don’t miss important deductions, keeping receipts (either digital or paper) is important if you or your business are ever audited.
- Forgetting to Make Quarterly Payments. As a business owner, you need to make estimated tax payments every quarter, like clockwork. If you forget, you will have serious problems at tax time. Mark the quarterly tax payment deadlines on your calendar and send the full amount in by those dates to avoid unnecessary problems and penalties.
- Mixing Personal and Business Finances. Keeping personal and business finances separate will prevent errors and save time. If you don’t separate them, it’s easy to overlook a business deduction or erroneously treat personal income as business revenue. Keep a separate business bank account and use a separate business credit card to ensure your business income and expenses are clear and easy to track.
Take Advantage of Professional Tax Advisors
Tax planning and preparation for a small business owner can be extremely challenging. That’s why working with an experienced accounting firm is a good investment.
Nolan Accounting Center’s financial services make the life of small business owners easier. Rather than spending your free time worrying about tax filings, you can spend more time focused on growing your business and generating profits.
Our bookkeeping and accounting services are designed to provide the financial information necessary to ensure your tax preparation is completed accurately and efficiently.
If you’re looking for a blend of personal service and expertise, Nolan Accounting Center is here to serve you. We provide accounting, tax preparation, bookkeeping, and payroll services to small business owners in Southeast Wisconsin. We look forward to working with you to meet your financial goals.