Having a robust strategy in place to handle your taxes, helps you get a better understanding of the overall financial health of your business, and enables you to make wiser projections and investments. Additionally, it can help you capitalize on possible deductions that you may be eligible for, further enabling you to make potential savings that can be used to help your business grow and succeed.
But what is strategic tax planning, and just how important is it?
Strategic tax planning explained
As straightforward as it sounds, strategic tax planning involves businesses creating plans to help them minimize their taxes during a certain tax period. Ideally, tax strategies should be planned out during the middle of every tax year, and are best achieved with the help of a tax professional.
How important is tax planning for businesses?
The main advantages of strategic tax planning for businesses of all sizes, are as follows:
- It helps you to mitigate your tax liabilities
- It keeps you updated with tax laws (which can change frequently)
- It enables your business to grow
Now that you understand what strategic tax planning is and why you should be focused on it as a small business owner, here are 7 tips that should help you better plan your taxes, all year round:
- Select the right software for your business
Even if you outsource your accounting requirements, they will use accounting software to help ensure that nothing important gets missed during tax time, such as expenses or important documents, and if you’re going solo, you should take the time to choose the right software for your needs.
- Keep a close eye on your spending and your budget
By tracking your spending at all times, you can keep a better handle on your expenses, both fixed and variable; many business owners find monthly expenses and budget check-ins, beneficial, while others may prefer to do it on a weekly basis.
- Separate your business and personal expenses at all times
Confusion can easily arise when personal and business expenses aren’t kept strictly separate, and having a different bank account for each, is the first step to avoiding any issues.
- Be mindful of important deadlines
By marking critical deadlines off on your calendar, you can ensure that you always meet tax deadlines, and are never faced with fines or penalties for late filing.
- Seek professional help
Whether you hire an in-house accountant or outsource your requirements, doing so can relieve some of the pressure when it comes to tax season, and engaging their services all year round is the ultimate way to minimize your taxes and avoid fines and penalties.
- Where applicable, use the qualified business income deduction
While there are regulations involved and certain limitations, this particular deduction allows owners of pass-through businesses a deduction that’s worth as much as 20% of their share of the businesses income.
If you’re operating a pass-through business such as a sole proprietorship, LLC, S corps or partnership, this deduction could be applicable to you, and if you’re unsure, simply ask an accounting professional.
- Think about giving bonuses and retirement benefits to employees
Not only is awarding your employees with bonuses a great way of incentivizing and motivating them, but it’s also a great way to boost your tax deductibles. Do note however, that bonuses must be paid within two-and-a-half months of the end of the year, and to the employee directly. In a similar vein, 401(k)s set up for employees before the tax year’s end, can help you lower your taxable income as your contributions to the plan are tax deductible.
While tax season comes around but once a year, strategizing your taxes should be a constant process that takes place all year round. The best way to alleviate this burden and give yourself the greatest chance of reducing your taxes, is by working with a tax professional.