How to Simplify Year-End Tax Planning
Managing tax obligations can be a challenge for business owners, but proper tax planning can make it far less overwhelming.
Tax laws constantly change and filing requirements can vary depending on where you live and operate. Of the nearly 263 million tax forms the IRS processes every year, you have no way of knowing which ones didn't take advantage of tax benefits the filers were simply unaware of.
Year-end tax planning will provide you with a road map that makes next year's taxes easier to navigate so it takes up less headspace during busy times.
Here's how to simplify the year-end tax planning process.
First, Review Your Current Financial Position
Start with the data that you know: how your business is currently doing.
If your business is new, stable, growing, or going through changes, it will greatly affect the tax planning process. A financially healthy business also has different considerations compared to a business going through a rough patch.
Looking at the current year's financial data also gives you an idea of the tax benefits you may be eligible for in the coming tax year.
Take the Time to Set Clear Tax Goals and Objectives
Your industry, headcount, and other aspects of your business will shape your year-end tax planning goals. Every business owner has a unique financial situation, so the objectives you create might differ from your peers.
For instance, if your business sells handmade goods, you may prioritize finding an inventory management solution that makes tax filing easier. A software company could prioritize projects that qualify for R&D tax incentives.
Life and business will happen, but if you anticipate a major change or unusual transaction, this is the time to plan for potential tax consequences.
Organize and Update Financial Records
Good recordkeeping is a solid foundation for simplified tax filing and tax planning. Make sure that your financial records are accurate and up-to-date. If your records are messy and have large gaps, it makes every other aspect of managing your financial and tax obligations far more difficult. For deductions that require more recordkeeping than dollar amounts alone, you need to be able to find:
Invoices
Expenses
Receipts
Logs
This is the time to find a financial recordkeeping solution that best fits your business needs and personal preferences. Reach out to an experienced accountant for help building a system that makes sense for your business as it grows.
Review Potential Deductions and Credits
Credits and deductions are available at both the personal and business levels and tax laws change every year based on Congressional actions and the outcomes of Tax Court cases.
There are so many deductible items and other tax benefits that you may be unaware of: did you know that cat food may be deductible if you have pest control issues? Crazy, we know, but see Seawright v. Commissioner and how they made it happen.
Your deductions and credits might not be as outlandish, but year-end tax planning is the time to take a closer look at the tax benefits most commonly used in your industry. The law may have changed, such as the sunset of various CARES Act provisions or the benefit amounts indexed for inflation.
This gives you time to determine how much of your activity in the past year qualifies for this benefit or what you should plan for in the coming year.
Manage Your Expenses and Make Year-End Purchases
Business expenses are often at the heart of tax planning engagements. They help you identify areas where you can do some cost reduction, like cutting off software and other subscriptions you're barely using. Your deductible operating expenses and overall burn rate need to be examined relative to your business and tax savings goals.
An accountant can help you with timing certain planned expenses to get the most benefits. Certain complex deductions, like depreciation of big-ticket purchases such as vehicles and equipment, have more delicate time constraints than a simple purchase like ordering office supplies. Bonus depreciation and electing for Section 179, where you expense the item, also majorly affect tax planning and the current year's taxes.
However, simple transactions also add up. If you anticipate that next year's profits will be higher than the current year, you may want to put off ordering those supplies if it can wait. If you think next year's profit won't be as high due to project expenditures or a planned closure, making purchases before December 31st would be more beneficial for the current year's tax bill.
Reach Out to Accounting Made Accessible for Help with Year-End Tax Planning
Every business owner has different priorities when it comes to tax savings and cutting down on administrative burdens. An experienced accountant knows exactly where to look for those checkboxes you might miss. They can also provide you with actionable tips you can implement throughout the ensuing tax year to reduce headaches and increase savings during tax season.
Accounting Made Accessible can assist with your year-end tax planning. Book a call with us today to speak to one of our friendly and professional accountants.