Many companies take a reactive approach to taxes: You fill out your return, pay what you owe (or collect your refund), then do the same thing again next year. However, this passive strategy can actually cost you thousands more in taxes over the years. That’s why we encourage our clients to take advantage of business tax planning services, and choose a more proactive approach to their business taxes. Keep reading to find out how tax planning and tax projections can benefit your business.
Reducing Your Business’s Tax Liability
Taxes represent a significant expense for most business owners, and reducing that tax liability each year should be a primary focus. It’s why you hunt down deductions and find eligible credits that you can apply to your tax return every year. But if you’re doing that only after the tax year has ended, you’re missing out on a lot of opportunities to cut your taxes. Professional tax planning throughout the year can do much more for you in terms of reducing your tax liability. We’ll examine your projected taxes and finances over the next several years, developing more comprehensive tax strategies that save you more money.
One simple example involves “bunching” your tax deductions. Rather than taking the standard deduction every year, you can pay two years’ worth of qualifying itemized deductions in a single year—for example, purchasing next year’s business supplies and equipment at the end of the tax year, instead of at the beginning of the year like you always do. If you make your supply purchase for 2022 at the beginning of the year, then make your purchases for 2023 at the end of the 2022, this doubles your deductible expenses for that year, which could make it more beneficial to itemize; then, the following year, you would take the standard deduction, when your itemized expenses are much lower.
Bunching properly takes planning and foresight, which is why we strongly recommend that you work with a CPA to ensure you’re using this strategy effectively. This is also only one example of how we can help you reduce your tax liability with a long-term approach to your taxes.
Being Prepared for Your Company’s Tax Bill
When you take a passive approach to taxes, you are essentially filling out your return and hoping for the best. Many people utilizing this approach have had the unpleasant experience of being shocked by what they owe when the paperwork is done. This may be caused by changes to tax laws, or simply by changes to your own financial situation, which you were unaware would have such a drastic impact on your business’s taxes. In some cases, you may end up owing much more than expected, and could find yourself unable to pay your tax bill.
While proper tax planning may be able to help you lower your tax bill, tax projections can also help you to be prepared, and avoid those unpleasant shocks that arise from blindly filling out your tax forms. We’ll look at your current finances and give you a careful estimate of what you’ll owe when it comes time to file. This can give you several more months to plan and save for that tax bill, rather than scrambling to find the funds you need before the payment deadline.
If an early projection still isn’t sufficient time for you to be able to pay off your tax bill, we can also help you work with the IRS to request a payment plan.
Making Decisions before the Tax Year Ends
As you know, the taxes you’ll owe when filing next tax season are based on your income and expenses for this year. If you don’t do any tax planning or projections, the opportunity to impact your tax situation will be largely closed by the time you file your return. Professional tax planning can give you a clear picture of your tax situation now, so you have time to make adjustments before the end of the year. For example, you could purchase a piece of equipment you’ve been putting off buying, make some deductible contributions to charitable causes, or increase employees’ end-of-year bonuses. All of these can reduce your tax liability and put you in a better tax position come spring—but only if you start planning now.
If you want to gain more control over your taxes, rather than simply filing and paying every year, contact Peter Witts CPA today. We’ll sit down with you to go over your financial situation and determine how business tax planning and tax projections can benefit you.