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No matter the size of your company, tax planning can be a major headache because the process can be complex and stressful. Plus, if tax planning isn't done properly, it can end up costing your business dearly with you either paying taxes that could have been avoided or incurring tax penalties as a result of noncompliant financial reporting.
With savvy tax-planning strategies in place and a robust bookkeeping and accounting system, however, small business tax planning, mid-market tax planning, and even tax planning in a large corporation can be simple, cost-effective, and mostly stress-free.
Maximizing Tax Savings With These Tax-Saving Strategies for Businesses
There are five basic pillars of tax planning which include deducting, deferring, dividing, disguising, and dodging. Although some of these might sound illegal, there are legal ways to work within our tax system and these pillars to reduce the amount your business owes the IRS. Consider the following tax-planning tips to save your business money.
Use the Right Type of Business Entity
The type of business entity you operate as has a big impact on taxes, and the business entity you choose to begin with might not be the best entity type to continue operating with as your business grows. Depending on how much you are earning as a sole proprietor, limited liability company, or limited liability partnership, you might end up paying more to cover your self-employment and Medicare taxes than you would pay in payroll taxes when paying yourself through a different type of business entity.
A tax professional can help you evaluate your business's numbers, current entity type, and other options to help you determine if changing your business's legal structure could save you money.
Be Compliant and Stay Current With Tax Law Changes
The last thing you want to do is incur unnecessary expenses as a result of tax penalties. Be sure you file the right forms for your business entity and stay current with tax laws as they change. Keeping up with the latest tax code will not only prevent you from making costly mistakes but could also end up saving you money with new rules and regulations that arise in your favor.
Reduce Adjusted Gross Income
Although this might be obvious, it's important enough that it should be mentioned and emphasized. Finding ways to reduce your adjusted gross income will help you save money on taxes. You can reduce this number with deductions such as deductible business expenses.
Even deductions that might appear on your personal taxes (relevant for sole proprietors and LLC owners) can help you reduce the amount of taxable income you have, so be sure to keep close track of things like deferred tax retirement account contributions, health savings account contributions, mortgage payment interest, medical payments, property taxes, and charitable donations.
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Deduct a Home Office
If you're using a part of your home exclusively to conduct business, then you likely qualify for a home-office deduction - regardless of whether you own or rent. There are, however, some stipulations about if and how much you qualify to deduct from your taxable income for a home office, so be sure to talk with a tax expert to make sure you're deducting by the rules.
Deferring Income and/or Pre-Paying Expenses
Depending on your accounting method and business type, you might be able to do a little fancy footwork at the end of the year to reduce the current year's taxable income by deferring income to the next year or paying for upcoming expenses during the current tax year.
Use the Best Accounting Method for Your Business
There are a variety of different accounting methods. The two most common are accrual-basis accounting and cash-basis accounting. The accrual accounting method requires that revenue be recorded when it is earned and expenses as they are incurred, and the cash accounting method allows for transactions to be recorded when the money is received or sent.
Certain business types and industries require particular accounting methods. If you have a choice, however, talk with a tax expert to determine the accounting method that will best benefit your business at tax time.
Compensate Employees With Fringe Benefits
Another way to reduce your overall tax burden is to lower the amount you pay in payroll taxes. Instead of offering high salaries, attract and retain employees with fringe benefit plans that are not subject to payroll tax. Examples of fringe benefits include:
- Health, dental, life, disability, and other types of insurance
- Childcare assistance
- Tuition reimbursement or student load payment benefits
These all represent excellent ways to reimburse your employees without increasing your payroll tax bill.
Be Smart About Expense Reimbursements
If you aren't using an accountable plan, then you'll have to record employee expense reimbursements as payroll and pay payroll taxes on them. So be sure to document and handle these reimbursements with an accountable plan to ensure they count as the business expenses they truly are.
Use Depreciation When It Makes Sense
Depending on your business's current income, big expenses such as equipment or property purchases might make more sense to depreciate over time rather than deduct as a one-time deduction. By depreciating, you can take advantage of the deductions into the future when your business might have more income or even be in a higher tax bracket.
Minimizing Tax Stress With These Tax-Efficient Business Practices
No one enjoys filing and paying taxes, so tax time will always be inherently stressful. However, it can be less stressful if your business is organized and prepared to file its taxes when your company's year-end rolls around. Most of the anxiety around tax time comes from a lack of organization and preparedness. The following advice can help you enjoy smooth sailing and simplified tax filing in your business.
Keep Personal and Business Finances Separate
In startups and small businesses especially, the comingling of personal and business finances is a common mistake that business owners make. Using personal accounts or credit cards to pay for business expenses or using business accounts and credit cards to cover personal expenses is messy because it requires you to go back and sort through twice the number of accounts for business expenses. You then have to reimburse these transactions and keep a record of everything involved with the transactions. In other words, it's messy and difficult to deal with at tax time. Plus, it doesn't look great during an audit, if you have personal expenses listed on your business accounts.
From the get-go, open up accounts that are designated for business use only and only use them for business. If you need to use personal funds to cover some of your operating costs, then transfer the money from your personal account into the business account to cover the expenses. This way you can easily document the cash injection into your business and the outgoing money.
Keep Accurate and Thorough Records
Everything you report on your tax filing needs to be backed up with proof. This requires you to keep thorough and accurate records of your business's financial transactions. You should have receipts and invoices matched to the money flowing into and out of your business.
Keep Your Books Up-to-Date on a Set Schedule
The more frequently you update your records, the better because this will give you more accurate financial data to base your strategic decisions on. However, you should at least be closing out your records at the end of each month. This entails updating all of your ledgers and reconciling them with statements.
Always Be Ready for an Audit
It's an excellent practice for business owners to keep their businesses audit-ready at all times. This means that your financial records are maintained on a routine, regular basis - not simply when tax time comes around. When it's time to file your taxes, you don't want to be sorting through a giant, disorganized box of receipts. Instead, your transactions should be recorded and receipts/invoices should be filed, as the transactions occur.
Having your records organized at all times means that, if you are subject to an audit, it will take less time and go much more smoothly. It also means that tax time won't generate that much extra work or headache in your business because you'll already have all of your records, numbers, and documents together and in order, ready to file.
Automate Processes With Bookkeeping and Accounting Software
If you're like most business owners, then you likely don't have a lot of time to worry about back-office housekeeping regularly. You also might not have a full, in-house staff of bookkeepers and accountants enlisted to keep your records current.
One solution that can help immensely is to automate as many bookkeeping and accounting processes as possible using bookkeeping and accounting software, along with fully integrated tools to facilitate organization-wide management.
Automating manual processes in your back office operation not only saves time and keeps records current, but it also reduces human error, increasing the accuracy and reliability of your financial records. This means you'll have fewer mistakes in your tax documents and fewer losses that occur as a result of tax penalties.
Avoid Stress and Maximize Savings With Outsourced Business Tax Planning
Plus, Think Beyond Tax Season With Outsourced Financial Planning and Management Accounting
If tax planning and the financial management of your business overwhelms you, there is an affordable and highly effective solution - outsourcing your back office. Outsourced bookkeeping and accounting professionals can help your business with tax planning and financial management to maximize savings and profits throughout your business. With an outsourced back office, your business can get set up with an efficient, accurate, and secure accounting system in addition to professional guidance, help, and advice designed to maximize your company's financial potential..