Small Business Tax Planning Tips

Business owner with calculator

Did you know that tax planning for your small business can help reduce the taxes that you owe?

Unlike tax preparation – when you get your taxes ready for quarterly or year-end filings – tax planning means thoughtfully considering the deductions and credits that your business can take throughout the year to help lower the amount of taxes you pay. In addition, tax planning helps you understand what you need to file and what records to keep.

With help from a certified public accountant (CPA) or tax advisor, small business tax planning can lead to sizable savings for your business. For more about this, Pursuit spoke to John Bevilacqua, CPA and partner at The Bonadio Group, an accounting and financial consultant group with locations across New York State. Here’s what he had to say:  

When it comes to tax planning, what mistakes do small business owners commonly make?

Small business owners often wear many hats when operating their business. They are in charge of marketing, product development, management of staff, accounting, etc.  The small business owner is so busy working in their business they have little time to work on managing their business.

One of the most common mistakes made by small business owners when it comes to tax planning is treating it as a post year end exercise. Many do little tax planning before year-end and that results in no real opportunity to impact taxable income. This is especially true for cash based taxpayers where the timing of cash receipts and vendor payments can significantly impact current year earnings. For example, cash basis taxpayers can deduct prepayment of expenses as long as they do not exceed 12 months or beyond the end of the following tax year.

Small business owners also often fail to recognize that there are other important compliance requirements related to their business. These include the need to register as a sales tax vendor, preparation of annual forms 1099-MISC for their vendors and appropriately distinguishing between employees and subcontractors. Failure to appropriately comply with the requirements related to the above matters can expose the business owner to significant tax liabilities.

What are some small business tax tips?

Keep good records and reconcile your bank accounts on a monthly basis. Consider utilizing QuickBooks or Peachtree software to help in these efforts. By keeping good records, you will have an accurate snapshot of your business to use as a basis for any tax planning strategies or decision making you may be considering.

Seek out a good CPA or tax advisor to address tax questions or concerns throughout the year. Meet on a quarterly or semi-annual basis to uncover effective tax-planning strategies for your business.

Do not make a big purchase for equipment or vehicles for the sole purpose of tax savings. Consider if the purchase improves your process and impacts efficiency and profitability.”

What are common deductions for small businesses?

“Almost anything that supports the ordinary and necessary operation of your business is tax deductible. Common deductions include cost of goods sold, wages and taxes, occupancy cost, marketing, insurance and travel & entertainment expenses. It is crucial to maintain proper records to substantiate business expenses and prove they were business related. For example, entertainment expenses should detail who was there and what business was discussed – these details will be needed if and when there is an audit. For company vehicles, you will need to contemporaneously log the mileage related to business travel.

For all business tax deductions, be sure you can prove that the cost was for a business expense. Simply providing a copy of the check that paid for an expense or a credit card statement that shows the purchase is not enough. You will need to maintain the original vendor invoice or other proof that shows what the purchase was for. Always get a receipt, especially when paying in cash.”

Does business structure affect the taxes you pay?

“Your business structure will affect how you are taxed. The chart below outlines federal tax forms and obligations for common business structures. For a more comprehensive list, visit the SBA [Small Business Administration] website.”

Conclusion

Smart tax planning can lower the amount of taxes that you owe, but it’s an ongoing process. To get the most out of it, meet with your CPA or tax advisor throughout the year and be prepared for your meetings. Bring your current financial statements, and share your ideas about upcoming purchases, staffing or other changes.  This will enable your CPA or tax advisor to help you plan to save now and in the future.

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