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? When you’re looking to grow your business, tax planning plays an important part in shaping your overall vision.

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 big savings for your business. John Bevilacqua, CPA and partner at The Bonadio Group, an accounting and financial consultant group with locations across New York State, shared his knowledge and expertise to help small businesses like you get the most out of your tax planning process. 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’re 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 their 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, if your business is a cash basis taxpayer, you can deduct prepayment of expenses as long as you 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. If your business doesn’t appropriately comply with the requirements related to the above matters, you can be exposed to significant tax liabilities.

What are some small business tax tips?

Tax planning isn’t a one-time activity that you do for your business once a year. There are many actions you can take throughout the year to ensure you’re in good shape when it’s time to work on your taxes.

  1. Most importantly, keep good financial documents and reconcile your bank accounts on a monthly basis. Consider using QuickBooks or Peachtree software to maintain accurate and clean financial records. 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. It will also help you develop strategies to address issues related to inventory, staffing, and more.
  2. Seek out a good certified public accountant (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.

    If you’re not already working with a CPA, know that this type of expert can act as an integrated part of your small business team beyond tax season. They can help with financial planning, estate planning, business succession, and other accounting services. Ask your fellow business owners for recommendations and referrals and be sure to check references to find the best fit CPA for your business.
  3. Don’t 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 the cost of goods sold, wages and taxes, occupancy cost, marketing, insurance, and travel and entertainment expenses.

It’s 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. With company vehicles, you will need to log the mileage related to business travel as you or your employees use the vehicle.

In all your 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 legal business structure will affect how you are taxed. Sole proprietorships, partnerships, limited liability companies (LLCs), and S or C corporations, and nonprofits all have different obligations for taxes and liabilities. Each structure also has its own pros and cons. Get in touch with your accountant and/or attorney to determine which type of structure is the best fit for your business. Consider your current and future business needs.

You can compare the differences and details on taxes for each structure on the SBA website. Remember, your legal structure is a major decision and should not be made without input from a tax and legal expert.

Conclusion

Smart tax planning can lower the amount of taxes that you owe. But the process offers far more long-term benefits as well. Tax planning is an ongoing process with important action items to take throughout the year. 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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