WHEW! Tax season is over! *cue angels singing*
For 15 years I prepared tax returns and one of the most important things I took away was the importance of tax planning for small business owners. As much as we all hate, yes hate, paying taxes we have to do it. We can’t get around it. Instead of RECEIVING money from our dear Uncle Sam we have to GIVE him money. And we don’t like it!
But why wait until the end of the year to get a surprise that you don’t want? No one wants to find out on April 14th that they owe Uncle Sam $5,000, $10,000 or even $20,000 in taxes. All because you didn’t plan accordingly.
Well I have some tips for you that you can use during the year to help you avoid this big unwanted surprise next April.
- Start with your prior year return. Unless you are experiencing major changes within your business, your income in the upcoming year should be pretty close to what it was the year before. If you have a business growth plan, you will likely increase your income. Based on this expectation, you should bank on owing approximately the same amount of taxes each year. Now I am not saying that things cannot happen to change this. But it is a good starting point. We’ll go over what to do about changes further down.
- Make adjustments for major changes. Now if you do plan on some major changes, such as a new division, program, product or event, and you expect these things to considerably increase your income, then add that figure to the one you started with above. Take you anticipated net income from these major events and add it to your prior year taxable income to determine your projected taxable income. You can get this anticipated net income figure from the budget you prepared for those programs and events. You did do a budget right? Ok well that’s another blog. The same rule applies for major changes that can reduce your bottom line, such as you discontinued programs or products, events that won’t occur or divisions discontinued.
- Take advantage of allowable deductions. Many small business owners fail to take advantage of deductions that were established with the small business owner in mind. Do you have a home office? If you use this space exclusively for business you can take a deduction on your return based on the square footage of you office. Are you saving for when you decide to sell your business and retire? There are retirement plans that allow you to put away more than the maximum $5,000 an IRA allows. And don’t forget mileage on personal vehicles. If you don’t maintain a separate company vehicle, be sure to track your mileage expense – this deduction can be a major game changer for your taxable income.
- Adjust your projected income every quarter. So you start with the prior year figures and adjust it for major changes in April. Well what do you do if some new anomaly occurs in June? You adjust it again. Since you are looking at your annual budget and cash flow projections on a monthly basis, you will begin to notice how your business is trending; and whether or not you need to re-adjust your projected bottom line. Don’t wait until December when the year is pretty much over. Assess things quarterly.
- Pay your quarterly tax payments. Lastly pay your taxes quarterly. At a minimum pay 100% of what you paid the year before to avoid penalties and interest.* Just take the total tax number on your return and divide it by four. If you don’t expect to make the same amount of money after the above steps then have your CPA or tax accountant prepare a tax projection with the projected amount you should pay. The idea here it to pay something. Paying a portion of your taxes during the year is the only way to avoid a big balance in April.
What advice can you provide about how tax planning has benefited you? Did you take advantage of some tax planning measures to reduce your year-end balance?
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**Sherrell is not a tax accountant or CPA. See IRS guidelines for estimated tax payment guidelines and consult your tax accountant or CPA.