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7 Tax Planning Tips for Small Businesses

Written by prositesfinancialDec 20 • 3 minute read

tax planning

Filing and paying taxes is undoubtedly among the least favorite things most businesses do over a year, yet it needs to be done correctly and efficiently. A good tax strategy is crucial to minimize your tax burden and maximize your deductions by following all applicable tax laws and deadlines. Here are some essential things to keep in mind as you plan.

1. Avoid Mistakes Or Omissions

Be very careful with your filings to minimize errors and eliminate inappropriate filings. The IRS charges hefty fines, interest and penalties to businesses who file taxes incorrectly. Each aspect of your taxes must be filed correctly, ranging from sales tax to payroll tax and income tax. If you don’t have any experts in-house who can handle tax filing, you might want to consider hiring a tax advisory firm or specialist to help ensure things are handled correctly. Look for someone with excellent attention to detail and a comprehensive understanding of tax law.

2. Maximize Your Deductions

There are a tremendous number of tax deductions available to small businesses. Some are not obvious, so do your research and consult with an expert to ensure you are getting all of the deductions you can legally claim. Deductions allow you to subtract business costs from gross income, so you pay less in taxes for the year. Popular deductions that you should look into as a small business owner include home office supplies, automotive costs, and entertainment and travel expenses.

3. Adjust the Dates

You can file an extension for October rather than April. This gives you more time to get all of your documents in order and put together your tax strategy. Besides, you may also be able to do other things such as postponing certain actions and moving others up. For example, some businesses like to delay the collection of payments and the sale of assets until after the new year, so they don’t have to count the income for the current tax year. On the other hand, businesses often like to accelerate equipment and real estate purchases to get them in before the new year. These strategic moves are part of an effective tax planning strategy.

When pushing income or expenses back and forth as a tax strategy, it is important to make sure you spread out your income in such a way as to avoid being pushed up into a higher tax bracket. If you go above the line and into another tax bracket, this strategy could backfire, causing you to end up paying a higher tax rate on all your net income.  

4. Correctly Classifying Your Business  

If you incorrectly classify your business, you could end up paying more taxes than necessary. It is vital to correctly categorize your business so that you only pay the fees required by the IRS.

Each classification of business is taxed under different rates and liabilities. It is essential to do your due diligence and see which type of business classification would best serve your needs. Some examples of business classification include Limited Liability Corporation, Sole Proprietorship, Partnership, S-Corporation, and C-Corporation.

5. Consider Monthly Payments  

If your business is having trouble making its tax payment, you can negotiate a monthly payment with the IRS. This will enable you to pay your annual tax burden in small increments each month. The specifics of your tax payment arrangement will depend on your business’s eligibility and needs. These plans can be genuinely helpful in some cases but beware of interest payments that could come back to bite you later.

6. Keep Your Books in Order Year-Round

One of the simplest and perhaps most obvious tax strategies is to get organized at the beginning of the year and stay that way throughout the year. You can’t control what you can’t see or measure. If your business finances are a total mess and completely disorganized, you will not be able to evaluate them as you plan your tax strategy.

7. Go Digital

A good starting point for getting organized is to set up a bookkeeping system such as Quickbooks, to electronically and automatically keep track of everything. Trying to manage payments, invoices, transfers, tax forms, and checks on paper can make it unnecessarily complicated, whereas having a digital system that handles everything can help you stay organized.

Come tax season, these types of bookkeeping systems make your life a lot easier and can often even help you with tax filing by collecting all the information, filling in the forms, and submitting them electronically for you.

As you can see, there are many tax planning options and strategies available to you as a small business owner. As we’ve said before, it is incredibly important to do your research and know what options and strategies are best for your business. Consult with a tax planner or advisor, and don’t be satisfied with standard generic answers. Seek out tailored advice with excellent attention to detail from professionals with a comprehensive understanding of tax law and the experience and reputation to back it up.

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