Skip to main content

If you are a busy business owner, it can be easy to want to put off dealing with your taxes. You may only want to think about taxes when you are forced to — at tax time. But with so many benefits of early tax planning, you need to start thinking about taxes right now.

Let’s look at why it’s important for businesses to think about their tax plan year-round and how it can benefit you and your company to start tax planning right away.

This guide will look at:

  • What Is Tax Planning?
  • Tax Planning For Small Business Owners
  • The Benefits of Tax Planning
  • Year-Round Tax Planning Strategies
  • How to Do Tax Planning

What Is Tax Planning?

Tax planning is the practice of analyzing and arranging your finances to legally maximize tax breaks and minimize tax liability.

Rules and regulations dictate how much you and your business pay in taxes each year based on hundreds of factors. Tax planning allows you to review those factors and make decisions that maximize the benefits of tax credits and tax breaks for your business.

Tax planning is more than just keeping financial records and sending them to your tax accountant once a year. 

Tax planning is the year-round act of:

  • Conducting a careful analysis of your income, investments, expenses, and potential deductions or credits
  • Reviewing tax laws, rules, and regulations
  • Using that knowledge to make business decisions throughout the year that can legally minimize the amount of taxes your business owes while remaining compliant with tax laws

Tax Planning For Small Business Owners 

If you’re a small business owner, your taxes are likely more complex than a person with one job at a full-time employer.

Business owners face unique tax planning challenges. Depending on the tax structure of your business, you may need to file one personal return or a personal return and a business return. The tax structure of your business determines what type of tax returns should be prepared.

  • A single business owner operating as a sole proprietor or single member LLC files one tax return which includes business financials as well as personal financials, unless the business has S-corp tax status. If the business has S-corp status, the owner must submit both a personal and business tax return.
  • Business owners operating a partnership must file personal returns for individual owners as well as one business return, unless the business has S-corp tax status. If the business has S-corp status, the owners must file personal tax returns and one tax return for the business.
  • Business owners operating a corporation file personal returns and one business return with a C-corp tax status.

Not only are the tax returns different depending on the tax structure of the business — the strategies for tax planning will be different. Business owners need to take extra considerations when tax planning as it can impact both their personal and business finances.

Related: The 10 Tax Mistakes You Don’t Want Your Small Business to Make

The Benefits of Tax Planning

The phrase “tax season” implies that there is a certain time of the year when business owners should consider their taxes. But in reality, tax planning should be something business owners think about all year.

You shouldn’t wait until the end of the year to start tax planning.

If you wait until the last minute, it may be too late to make changes or decisions that lead to meaningful changes. When you are engaged in consistent tax planning, you can make decisions throughout the year that provide the following benefits to your business.

  • Reduce liabilities. Identify more opportunities to decrease your tax liabilities so you can potentially pay less in taxes.
  • Maximize deductions. Find tax deductions you may have missed that could decrease your tax liabilities.
  • Improve cash flow. Manage your cash flow by having a better idea of how much you owe in taxes and by making quarterly payments.
  • Make better investments. Consider tax regulations and laws while investing your money to lead to higher long-term gains.
  • Ensure legal compliance. Avoid making errors that can lead to fines, interest charges, and expensive audits.
  • Avoid unexpected tax bills. Project your tax liability and make regular payments so you aren’t caught off guard by a large tax bill.
  • Support estate planning and wealth preservation. Keep an eye on the future by setting up financial plans that can keep wealth in your business or in your family.
  • Gain peace of mind. Stop wondering if you are doing the right things with your money. Work with a professional who can ensure that you are following the rules while maximizing the benefits for your business.

If you aren’t using tax planning for your business, you could be paying more than you need to. You could be draining funds that could be used in more productive ways, and you could be missing opportunities to keep more money in your business and in your pockets.

To reap these benefits, you can’t wait until taxes are due to create a plan. You need to start tax planning right now.

Year-Round Tax Planning Strategies

If you wait until taxes are due, you can’t make adjustments that can benefit your business. When the year ends, you are stuck with the financial decisions you made throughout the year. In most cases, you cannot retroactively make changes.

That’s why it is so important to engage in tax planning all year.

Tax planning throughout the year gives you the time to make business decisions that can positively impact your taxes. It allows you to change course and implement changes that can financially benefit your business when tax time comes around.

Let’s look at a few examples of why you can benefit from starting your tax planning early. Here are a few ways your business can benefit from tax planning year-round.

#1) Make business decisions that affect tax liability while you still can.

As the clock winds down to midnight on December 31st, so do your chances of making business decisions that can impact your tax liability. In some cases, once the new year hits, you lose opportunities to make adjustments that can affect your taxes.

When you plan ahead, you have time to make business decisions that will affect your taxes.

#2) Decide if you should increase spending before the end of the year.

One way to decrease your tax liability is by increasing spending. Use your tax projections to determine if you should increase your spending before the end of the year. For example, if you anticipate that this year’s profits will be higher than next year, you may want to take more deductions this year.

If you determine you want to increase spending, you have time to:

  • Stock up on products and inventory you know you will need next year.
  • Pre-pay for services or fees that will be due after the first of the year.

Related: 8 Ways to Reduce Overhead in Your Business

#3) Decide if you should defer income until next year.

Just as you can alter your tax liability by increasing or decreasing spending, you can change your tax liability by increasing or decreasing income. In your year-end tax planning, determine if you should hold off on collecting income.

For example, if you want to have less tax liability for the current tax year, you may want to postpone income until the next calendar year.

#4) Identify opportunities to decrease tax liability.

When you get an early start on year-end tax planning, it gives you time to identify ways to decrease your tax liability and execute the tasks that need to be done to receive the credit or deduction. Here are a few examples:

  • Bad Debt: If you run your business on an accrual basis, take time to go through your accounts to identify outstanding invoices that are likely to not be paid. Plan to write off any bad debt.
  • Old Equipment: Go through your equipment to identify items that may be obsolete and require replacement.  Purchasing replacement equipment this year can help to reduce your tax liability by creating a deduction this year.
  • Employee Bonuses: The end of the year is a great time to show appreciation to your employees — while reducing your taxes. Bonuses to employees are always tax deductible as business expenses. Bonuses to shareholders and owners come with different rules, but can be deducted in some cases.
  • Employee 401k: Setting up and contributing to a 401k plan for your employees can benefit them and you as you can claim a tax credit for setting up retirement plans for your team.
  • Energy Efficient Property: Tax law includes possible deductions for businesses with energy-efficient property. Commercial property updates to energy-efficient HVAC, hot water, and lighting can lead to a deduction in some cases. Purchasing alternative and hybrid, energy-efficient vehicles may also lead to a tax deduction.

Related: What’s a Fractional CFO? Does Your Business Need One?

#5) Figure out what you should do based on changing tax rules and regulations.

New legislators and leaders can lead to changes in the tax code. When you plan ahead, you can look forward and see what changes might be expected. A few things to keep in mind as you look ahead to potential new tax plans.

  • Will taxes go up or go down next year? Determine which year would be better to have more liability.
  • What new tax rules were added, will be added, were revoked, or are likely to be revoked? Consider how changes to the tax code may impact your plans and opportunities.

#6) Decide if you need to change your tax status.

In some cases, small businesses may even want to change their tax status as tax season approaches. As businesses grow or evolve, there may be benefits to adjusting their tax status from a sole proprietorship, partnership, S corporation, or C corporation.

When you plan your taxes ahead of time, it gives you more time to determine the benefits of changing your status and execute the steps to changing your status.

Note: You can’t change your tax status every year, so discuss this topic with a tax professional or CPA as soon as possible. You want to plan ahead and also make sure you aren’t making a decision you will want to reverse in the near future.

#7) Prepare a projection to see what you might owe. 

When you start year-end tax planning early, you have time to create a tax projection. A tax projection can give you an idea of what you might owe for the year. Based on this data, you can determine if you need to make moves to impact the amount due, and if so, what decisions you should make. Plus, it gives you an idea of how much money you need to have to budget for taxes.

Related: The Beginner’s Guide to Financial Forecasting for Your Business

#8) Set up a tax payment plan. 

Year-round tax planning can give you an idea of what you will owe at the end of the year and a way to spread your payment out throughout the year. With a strong tax plan, you can set up a tax payment plan to make quarterly estimated payments. This strategy helps you avoid a big tax bill at the end of the year, better manage cash flow year-round, and prevent fines and fees that occur when you underpay your taxes.

#9) Spread “tax time” throughout the year.

One of the best benefits of early tax planning is that you don’t have nearly as much work to do when “tax time” officially starts. When you think about your taxes year-round, you are already set up to breeze through tax season. You will have easy access to documentation and reports needed to file, and you will have an idea of how much you will owe. By spreading tax efforts out throughout the year, you will get time back instead of scrambling to get your taxes filed.

Related: Planning to File a Tax Extension? Here’s What You Need to Know

How To Do Tax Planning

If your business isn’t actively working on tax planning, here are a few things you can do to get started. The earlier you can put these plans in place, the better the benefits will be for your business. So, don’t delay. Get started today.

Get your books in order.

It will be difficult to engage in tax planning activities if you don’t have accurate, up-to-date financial records for your business. The first step to being able to analyze your financial situation and make informed decisions that impact your tax liability is setting up a strong financial system.

Create systems for:

  • Payroll processing
  • Weekly bookkeeping
  • Monthly financial reporting
  • Month-end accounting entries and reconciliations
  • Vendor bill payment
  • Customer invoicing
  • AR collections

If you don’t have the resources to manage accounting or bookkeeping at your business, find a professional to help. You can outsource your accounting so a professional can set up and manage the financial systems you need for tax planning.

Identify your business goals.

The best tax planning is aligned with your business goals. Before you start tax planning, spend some time thinking about where your business is and where you want it to go.

Certain types of business goals can have tax implications so it’s best to outline these ideas before putting tax plans in place. For example, you may want to change your tax planning if:

  • Your business is planning to grow and needs to increase spending
  • You plan to purchase property or expensive pieces of equipment
  • You plan to hire additional staff or cut your staff
  • You plan to sell off equipment or business assets

Make your business goals a big part of your tax planning and include your upcoming objectives in all conversations with your tax or accounting teams.

Know important tax deadlines.

You can’t get the benefits of tax planning if the deadlines to make changes have already passed. Make sure you know important tax deadlines so you are aware of how much time you have to make decisions.

For example, the deadline to contribute to an employer-sponsored retirement plan and receive a tax benefit is December 31. If you decide on January 1 to contribute, you will have missed the opportunity and need to wait until the next tax season to reap the benefit.

Working with a professional tax partner can make it easier to know, monitor, and not miss important tax deadlines.

Find a professional tax partner.

Let’s face it. The tax code is complicated. As a business owner, you may be able to get a good grasp on the basic best practices for tax planning, but if you want to reap the full benefits of the tax rules and regulations that suit your business, talk to a professional tax partner.

Professional tax partners know tax law in and out and will be able to identify the best ways for you to make changes to your business to positively impact your taxes.

A tax partner may feel like an additional expense, but the expertise they provide can bring more money back to your business than what you spend on the services. You will get even more benefit if you find a tax service provider who is a partner, not just a processor.

Related: 40+ Questions To Ask Your Business Accountant 

Implement tax planning strategies all year. 

Don’t wait until tax time to start thinking about your taxes. Rather than hire a tax accountant at the end of the year, look for a tax professional who can act as a partner to your business all year long.

Hire a tax partner who will review your financials with you throughout the year and provide guidance and expert advice all year long so you can start implementing the tax planning strategies listed in this guide.

Start Year-End Tax Planning With CFO2U

Tax planning isn’t a seasonal business task. It is a year-round consideration that your business should regularly assess, analyze, and use to make business decisions.

Don’t wait until it’s too late. See what you can do right now to benefit your business by getting started with year-end tax planning.

If you need help, CFO2U is here to guide you through the process. Learn more about our tax preparation services and schedule a free consultation to see how the team at CFO2U can help you start planning before it’s too late. Schedule your free discovery call today. 

Susan Nieland