5 Effective Tax Planning Strategies for Business Owners

Strategic tax planning is key in helping business owners boost their bottom line. There are a lot of different ways to reduce the taxes your business pays which, in turn, leaves you with more cash to invest back into your business. Even some of the simplest tax strategies, when effectively employed, can save you significant amounts of money. Many business owners are so focused on the day-to-day operations of the business that they often overlook the importance of tax planning and preparation. However, failure to invest the time in long-term financial and tax planning for your business on the front end will surely cost you on the back end. This is why working with an experienced financial advisor can certainly better position your business for success. 

Below we will outline 5 tips to help you create an effective tax planning strategy to improve your business's bottom line. 

1: Change Your Tax Status 

Speaking to small business owners here. When establishing and structuring your business, you have several options concerning how you will operate. The structure you choose will impact your taxes so it’s important to be informed of the various tax implications that will come from your choice. Whether you started as a sole proprietor, partnership, limited liability company (LLC), S corporation, or C corporation, you can change your structure as your business grows and evolves, which can have a positive effect on your taxes at year-end.

2: Defer Income

The cash method of accounting, also known as cash-basis accounting, is common among small to mid-sized businesses. It is simple and relatively inexpensive to establish. The cash method of accounting, by simple definition, is an accounting method where payment receipts are recorded during the period in which they are received and expenses are recorded in the period in which they are paid. Simply, revenues and expenses are recorded when cash changes hands. Utilizing this method creates the opportunity for some strategic tax planning. By deferring income to a later year, many experts believe it can be beneficial in that you could minimize your current income tax liability and invest that savings back into your business.

3: Take Advantage of Retirement Accounts

Retirement accounts are a great savings vehicle because they allow deferment of taxes on your contribution dollars until the point of withdrawal, which by design, typically remain in the account until 59 ½ years of age. Retirement accounts are a sound tax planning strategy and include both traditional and Roth IRAs and 401(k) plans. 

4: Use Your Tax Credits

The Internal Revenue Service recognizes certain business policies and actions under the general Business Credit. According to the experts, small businesses in particular miss a lot of valuable credits because they don’t know they are eligible. Among these are the work opportunity tax credit, employee retention credit (COVID-19), health coverage tax credit, and the alternative motor vehicle credit. Figuring out ways to employ as many of these credits as possible is worth the savings at tax time. 

5: Take Deductions To The Max

Business owners are entitled to certain deductions as the cost of doing business, which goes against the amount of taxes you owe. It’s important to max out your eligible costs and expenses to greatly decrease your tax liability. Just as importantly, you must keep meticulous records of your deductions in the event of an audit. More on this below.

Mitigate Mistakes 

One of the most crucial things to keep ahead of in strategic tax planning is your financial documentation. This will make all the difference between a stressful and seamless end of the year. Keeping receipts and accurate records of all business transactions is key. If you have multiple employees, having a system in place to facilitate all transactions will save you from potential IRS trouble from any audits that might happen down the road. 

Another area to focus on in mitigating any tax missteps includes the responsibility to make your quarterly estimated tax payments to avoid penalties that will rear their ugly heads at tax time.  You also want to be diligent in keeping your business and personal finances completely separate. Establishing a business account that can keep record of all business-related transactions will keep you straight with the IRS in the event of an audit. 

If you do end up getting behind in your business taxes, there are ways to get back in the black. The IRS does recognize and accept tax payment plans for you to get squared away. You can take advantage of this opportunity by entering into an agreement to pay the back taxes within an extended timeframe. A payment plan for taxes should be used as a last-ditch effort to get caught up, but being proactive moving forward will be what pays dividends to your business. 

Partner with the Experts 

Tax planning strategies are a very complex venture and require a great deal of time. Add to that the ever-changing tax laws, penalties, and deadlines, and it’s no wonder why a lot of businesses overlook a lot of beneficial breaks. Let the experts at Olde Raleigh Financial Group help you strategize for minimal tax liability and optimal growth in your business. 

Disclosure:
This material is provided as a courtesy and for educational purposes only.  Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation.