Whether you have an S corp, a sole proprietorship in California, or another business entity, business taxes are more challenging than the average employed taxpayer’s return. You may have to review budgets, gather documents, and double- and triple-check all your information to avoid errors that can get you into hot water.
Instead of scrambling at the last minute – which will increase your mistakes – have a stress-free tax season by working on your taxes throughout the year. Strategic tax planning gives you an advantage come tax time with more efficient processes and organization.
What Is Strategic Tax Planning?
Tax planning involves analyzing your financial situation or plan to ensure that every element is working in tandem to minimize your tax burden and reduce your tax bill. This is what it means to be “tax efficient.”
Strategic tax planning takes it a big further by endeavoring to reduce the amount of taxes you must pay within a specified period of time. You should plan your tax strategy in the middle of the year to build and execute this strategy.
Why Is Strategic Tax Planning Important?
There are many benefits to strategic tax planning, including:
The goal of strategic tax planning, at its core, is reducing liabilities to avoid overpaying on your taxes. This takes time, so you can’t be tax efficient if you’re waiting until the last minute. When you prepare in advance, you can avoid mistakes, deduct allowable expenses, reduce your payable taxes, and have more control over your payment deadlines.
For example, if you have a lot of revenue near the end of the year that could increase your tax bracket, you can use strategic tax planning to move that to the beginning of next year. You could also spend it on necessary business expenses, reducing your tax burden and helping your business prepare for the upcoming year.
Plan for Tax Laws
Tax laws change often, and small changes can be big for your business. For example, COVID-19 brought on a lot of changes and requirements for small businesses, and if you’re not tracking these new laws and updates, you can’t adjust your strategy to match.
If you’re current on the new tax laws, you won’t be as likely to deal with noncompliance because you were unaware of new tax laws or regulations that apply to you. You’ll also have fewer errors on your return, which reduces your risk of a high bill or a cumbersome audit.
Evaluate Your Financial Health
When you’re planning for your taxes, you’ll learn about your business’s financial standing. You can use this information to make informed decisions about your business moving forward, including where you may need to adjust as your business ebbs and flows throughout the year.
For example. If you find that you have a lot of expenses, you can readjust your budget. If you’re bringing in a lot of revenue at a specific time of year, you can use that information to plan for other initiatives that could be profitable.
Steps to Strategic Tax Planning
Strategic tax planning happens over the year, not all at once. Here’s how you can get started:
Track Expenses and Evaluate Your Budget
You need to track your spending throughout the year to stay aware of your fixed and variable business costs. Otherwise, you’ll wait until the end of the season, which could lead you to forget certain expenses, make mistakes, or lose track of important documents that validate your deductions.
Another great strategy is budget planning check-ins, which give you a set schedule to follow to track your spending. You could also use an app to track your expenses, which may have features to help you visualize your spending patterns and possible deductions come filing time.
Don’t Comingle Funds
It’s essential to keep your business expenses separate from your personal expenses. If you don’t already have separate checking and savings accounts to separate your business and personal uses, get those set up. You may want to get a business credit card, which can help you keep up with expenses as well.
Plan for the Qualified Business Income Deduction
The qualified business income deduction offers a deduction of up to 20% of the share of your business income. This applies to pass-through business owners, though there are limitations. These businesses include limited liability companies (LLCs), S corp, and sole proprietorships, which have profits flow through the business to the owners for their individual business taxes.
Keep Up with Deadlines
There are several deadlines throughout the year to pay your quarterly taxes. Set up these deadlines for yourself on your phone or calendar, then add notifications to alert you as deadlines are coming up.
You should include your monthly or quarterly expense check-ins on this calendar as well. This will help you keep up with your expenses and prepare for your tax season.
Consider Employee Bonuses and Retirement
Employee bonuses are a good way to offer incentives to your employees, but it has a strategic business advantage as well. You can deduct employee bonuses for your business, but the IRS rules require you to finalize them by the end of the year and pay them within a few months.
Retirement plans are another way to reduce your taxable income. Once they’re set up, you can deduct the contributions you make to the plan before the year is up.
Streamline with Tax Software
Tax software is a good investment for your strategic tax planning. Instead of wasting time on manual processes, you can automate a lot of your accounting tasks and keep your tax documents organized ahead of tax season.
Predictive tax management software offers advanced features to help you manage your taxes all year long. You can report your income and expenses, report major events that affect your tax status, and pay your estimated quarterly taxes when they occur, rather than trying to fit it all in ahead of the deadline.
Enjoy a Stress-Free Tax Season
Tax time isn’t fun for most people. But you can plan for it all year long to make the process less stressful, more efficient, and more cost-effective.
Shahar Plinner is a tax and accounting expert with over 20 years of experience in the field. He is an entrepreneur and known as The Tax Guru on the west coast. Shahar moved to Seattle from Israel and founded, scaled, and sold a leading tax and accounting firm in the Seattle Metro area. Over the years, he served thousands of business owners and perfected the playbook for self-employed tax strategy. That’s why he founded Formations, to make sure the self-employed never overpay on taxes again.