By Ashley Miller, Halt, Buzas & Powell
As 2019 ends, business owners should begin formulating their tax strategy for 2020. While giving the IRS a cut of company revenue isn’t optional, the way you approach business finances can make a significant difference in the amount you pay.
Some tax savings strategies are no-brainers, but others may be less obvious. To keep more of the income your business generates and contribute less to tax coffers, make these tax planning best practices a priority as you prepare for a new year.
Some tax savings strategies are no-brainers, but others may be less obvious. To keep more of the income your business generates and contribute less to tax coffers, make these tax planning best practices a priority as you prepare for a new year.
Plan estimated tax payments to benefit cashflow.
Quarterly estimated taxes often create awkward cashflow patterns, but they don’t have to. Consider this obligation an opportunity to tailor a payment schedule that matches your company’s unique financial rhythm; plan to pay more when you expect big influxes of cash and less at times when financial demands are high.
There’s a limit to the flexibility here; paying at least the amount necessary to avoid penalties is a must. Beyond that, anything goes. If you anticipate a total tax bill of $60K, you might prefer four payments of $5K each plus one for $40K rather than four equal payments of $15K. Or maybe in your business, it’s easier to plan for three $10K payments and one that’s $30K. Whatever works for you is fine with the IRS as long as you pay the minimums due by each deadline.
Anticipate unusual financial events.
Spikes in income and unusual business expenses can both play havoc with your taxes. From legislative or accounting changes to replacing the company fleet, anything that represents a significant deviation from your normal cashflow pattern deserves thoughtful attention. Planning ahead means you won’t incur penalties by having to delay tax payments or take other dramatic steps. It also allows extra time to formulate strategies that minimize the tax hit or take advantage of higher deductible expenses.
Determine optimal retirement contributions.
Tax-deferred retirement contributions represent a valuable tax planning tool as well as an investment in your own future wellbeing. Having an unusually good year? You may want to max out the allowable contribution limits. The money you contribute now will directly lower the amount the business (or its owner, for passthrough businesses) owes in taxes for the year. You’ll probably end up paying at a lower rate when you withdraw the money, too. If you can’t contribute the maximum, figure out how much you can afford to sock away so you can reduce your tax bill as much as possible without creating cashflow problems.
Double check data and keep clear records.
When the information your CPA looks at isn’t accurate or complete, the results can be disastrous. Too often, one mistake based on sloppy record-keeping leads to a whole cascade of costly consequences like penalties, interest, tax notices, increased liabilities and more. Your accountant only knows what you tell her, not whether it’s accurate. Reconcile accounts often and verify bookkeeping throughout the year to prevent these outcomes Double checking balances and confirming tax payments only takes a few minutes now but it could save you a huge hassle later if something was mis-recorded. Pay attention to company credit card statements too; personal expenses there could result in higher taxable income than your CPA is planning for.
Check in with your CPA regularly.
Keeping your CPA abreast of what’s happening in the business is critical. Plan to check in early in the third quarter, even if you’ve done so earlier in the year (which you should). He can verify that your estimated tax payments are in line with revenue and start projecting year-end numbers. If there’s a potential concern anywhere, you’ll have time to prepare, formulate solutions and avoid unpleasant tax surprises. If not, you’ll feel confident knowing you’re in good shape. Either way, the critical thing is not to wait until Q4 to talk with your accountant. By then, it may be too late to do anything about the situation!
Working in partnership with your CPA, you can minimize tax liability and keep your business humming along efficiently by following the steps outlined above.
Quarterly estimated taxes often create awkward cashflow patterns, but they don’t have to. Consider this obligation an opportunity to tailor a payment schedule that matches your company’s unique financial rhythm; plan to pay more when you expect big influxes of cash and less at times when financial demands are high.
There’s a limit to the flexibility here; paying at least the amount necessary to avoid penalties is a must. Beyond that, anything goes. If you anticipate a total tax bill of $60K, you might prefer four payments of $5K each plus one for $40K rather than four equal payments of $15K. Or maybe in your business, it’s easier to plan for three $10K payments and one that’s $30K. Whatever works for you is fine with the IRS as long as you pay the minimums due by each deadline.
Anticipate unusual financial events.
Spikes in income and unusual business expenses can both play havoc with your taxes. From legislative or accounting changes to replacing the company fleet, anything that represents a significant deviation from your normal cashflow pattern deserves thoughtful attention. Planning ahead means you won’t incur penalties by having to delay tax payments or take other dramatic steps. It also allows extra time to formulate strategies that minimize the tax hit or take advantage of higher deductible expenses.
Determine optimal retirement contributions.
Tax-deferred retirement contributions represent a valuable tax planning tool as well as an investment in your own future wellbeing. Having an unusually good year? You may want to max out the allowable contribution limits. The money you contribute now will directly lower the amount the business (or its owner, for passthrough businesses) owes in taxes for the year. You’ll probably end up paying at a lower rate when you withdraw the money, too. If you can’t contribute the maximum, figure out how much you can afford to sock away so you can reduce your tax bill as much as possible without creating cashflow problems.
Double check data and keep clear records.
When the information your CPA looks at isn’t accurate or complete, the results can be disastrous. Too often, one mistake based on sloppy record-keeping leads to a whole cascade of costly consequences like penalties, interest, tax notices, increased liabilities and more. Your accountant only knows what you tell her, not whether it’s accurate. Reconcile accounts often and verify bookkeeping throughout the year to prevent these outcomes Double checking balances and confirming tax payments only takes a few minutes now but it could save you a huge hassle later if something was mis-recorded. Pay attention to company credit card statements too; personal expenses there could result in higher taxable income than your CPA is planning for.
Check in with your CPA regularly.
Keeping your CPA abreast of what’s happening in the business is critical. Plan to check in early in the third quarter, even if you’ve done so earlier in the year (which you should). He can verify that your estimated tax payments are in line with revenue and start projecting year-end numbers. If there’s a potential concern anywhere, you’ll have time to prepare, formulate solutions and avoid unpleasant tax surprises. If not, you’ll feel confident knowing you’re in good shape. Either way, the critical thing is not to wait until Q4 to talk with your accountant. By then, it may be too late to do anything about the situation!
Working in partnership with your CPA, you can minimize tax liability and keep your business humming along efficiently by following the steps outlined above.
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