With only two months left in Quarter 4, there's no better time than the present to implement thoughtful tax planning strategies that will set you up for a prosperous new year. So before you cut into the Thanksgiving turkey and uncork some holiday wine, don’t forget to give your business financials a thorough sweep! Read on for eight steps you can implement now to avoid unpleasant surprises during tax time.
1. Review Tax Compliance
It is common knowledge that neglecting compliance to the IRS inevitably leads to stiff fines and penalties. This is all the more reason to review your tax compliance before year-end. Many businesses and individuals can benefit from taking a closer look at their financials, where required quarterly payments to the IRS may slip through the cracks. For instance, when tax returns are filed, individuals who owe a tax liability over $1,000 are required to make an estimated tax payment. Likewise, an estimated tax payment is required for corporations expecting to owe over $500 (IRS). Creating a comprehensive tax plan will ensure your business is in compliance and poised for a strong start in the new year.
2. Analyze Upcoming Income and Costs
If you are anticipating a large revenue stream from a customer, consider the tax implications beforehand. Getting a bird's eye view of projected income or loss, will assist you in making estimated tax payments comfortably. While the end of the year sales cycle comes with the opportunity to skyrocket profits, Covid-19 has caused a perfect storm of high inflation and global supply chain issues and shortages, that may hinder success for businesses long-term. Don't let climbing costs and cash flow shortfalls keep you from maintaining profitability. Consider reaching out to a lender for a business loan or line of credit, to ensure you have enough cash on hand to cover big purchases and miscellaneous expenses. With careful financial planning, you have the ability to make informed business decisions and the flexibility to adapt in an increasingly unpredictable market.
3. Consider Purchasing Equipment
Want to reduce your taxable income and tax liability before year-end? Consider purchasing fixed assets. Equipment financing is a great option for your end-of-year purchases, because it allows you to conserve cash and pay minimal interest and fees. The purchasing of fixed assets can also be financed through loans or a line of credit. You can use the fixed assets purchased and placed in service during the year, to take a Section 179 depreciation deduction and immediately expense the entire cost of the asset. Working with new equipment also allows businesses to maintain their competitive edge, keep up with market demand and consistently innovate.
4. Make a Tax Plan
All of the above items can be used to put together a tax plan that assists in forecasting and minimizing your tax burden. To get started, simply include all the income and expenses from the beginning of the year to the current date, then take those amounts and project them to the end of the year to get a basic idea of the net income or loss. This will help determine how much will be owed in taxes. A tax plan clearly lays out the effects of purchasing additional equipment or any large costs through the end of the year. This will help implement effective cash flow management policies to ensure there are no cash shortages.
5. Analyze Current Technology
In a global market where conducting ecommerce and maintaining an online presence is essential, cybersecurity is extremely important. Because data has become the greatest currency, businesses must implement technology to safeguard against data breaches and information leaks. You should conduct a review to analyze the effectiveness of the current year's technology to determine if any new policies or procedures need to be put in place. Are your current software programs air-tight? If you experienced any data breaches or felt underserved by your current software, it may be time for a change. Shop around for different security systems and software programs for the right upgrade for your business.
6. Review Accounting Methods
Tax laws are constantly changing, making it advantageous to switch accounting methods in certain scenarios. While a larger business might operate using an accrual basis, small business owners can greatly benefit from using a cash method of accounting. This method allows you subtract certain items, like accounts payable and accounts receivable and could result in a lower taxable income amount.
7. Dive into Business Growth
Every business owner's goal is to hit the ground running come January 1, but before looking into product development, market penetration or diversification, creating a solid budget or business plan is invaluable. Start by running a trend analysis on the current year's income statement to pinpoint which categories of expenses may have been too high. Then create a budget or business plan based off your findings to improve income for the upcoming year.
8. Implement Wealth Planning
For most business owners, the daily demands that come with running a successful business, can often take time away from long-term wealth planning. Implementing a comprehensive wealth plan allows you to have a well-rounded view of your assets, liabilities, taxes and income. Wealth planning also has implications for your business. Depending on the structure of your business, you might consider taking a salary instead of a distribution. Even though you will have to pay self-employment taxes on a salary, a distribution could result in more taxes. Moreover, if your business is generating enough income, consider paying down any outstanding business loans. This increases your business's liquidity and leads to further investment opportunities, thus improving your long-term wealth profile.