Tax Planning Tips for Small Business Owners

Every year comes the inevitable tax season. Just the mere thought of paying taxes can drive small business owners crazy. While every business—both big and small—has to pay taxes, this time can be especially hectic for small business owners since they oftentimes must fight hard to turn a profit, and then to have to give up a fraction of that hard-earned revenue to the government can be quite disheartening. If is important to stay on top of your tax debt, as the taxman will never forget to collect its dues.

With that in mind, there are a number of rules and regulations associated with tax planning that must be adhered to.

Keep Your Books Up-To-Date

Ensuring that your bookkeeping is correct and up-to-date is paramount for accurate tax planning. Bookkeeping is oftentimes a whole separate job so most small business owners will hire a dedicated accountant to keep up with their financial records. Hiring a professional is always a good idea, but it isn’t required. In fact, there are plenty of tools and resources available to assist with paying taxes when you’re self-employed.

Bookkeeping software is vital for small businesses in tax planning. It ensures accurate record-keeping, tracks expenses for deductible items, automate tax calculations and provides real-time financial reports. Integration with tax tools streamlines the preparation process, and the software sends timely tax deadline reminders. In audits, it aids compliance by offering organized financial records. The software also facilitates the analysis of various tax strategies for optimizing outcomes. In summary, bookkeeping software enhances efficiency, accuracy, and strategic decision-making in tax planning for small businesses.

Regardless of whether you hire a professional accountant or do it yourself, maintaining accurate financial records will be absolutely crucial in tax planning and will help keep you from being audited.

Learn About Deferred Income

Deferred income can be one of the more confusing accounting principles, but it is no less important. Technically, deferred income is considered unearned even though it has already been paid to you. To put it simply, if you are paid in advance for a product or service that is to be delivered or performed later in the future, On a balance sheet, any deferred income will be categorized as a liability.

From an employee perspective, December can be a complicated month for deferred income since it is the last month before the New Year and is usually marked by better-than-average paychecks and Christmas bonuses. A lot of employers—both corporate and self-employed—choose to defer these payments into the next month with one very basic concept in mind: Why pay tax today if you can pay it tomorrow instead? Another good argument for deferred income would be if you thought you might be in the same or lower tax bracket.

A small business accountant near Phoenix AZ or your area can provide insights into the technicalities of deferred income. They can guide you in determining the suitable accounting period for recognizing revenue, a decision influenced by your business’s nature and contract terms. This guidance empowers you to make informed financial decisions. Additionally, the accountant assists in preparing financial statements that accurately reflect your business’s financial position, considering deferred income balances.

Purchases

The first quarter of the new financial year is very important for a whole host of reasons, one of which is that it is the time in which most businesses plan for most of their expenses including purchases and overall operating costs. The operating costs from the previous year are a good basis for estimating if it will cost more or less for the current year. By figuring out your expenses for the year, you can easily deduct the total expenditure costs from the operating income to determine profit.

To effectively limit and track purchases for a small business, establish a clear budget, set spending limits for employees, and implement a centralized purchasing system. Use purchase orders and company credit cards with predefined limits and automate expense tracking through accounting software. Conduct regular financial statement reviews and periodic internal audits to ensure compliance with purchasing policies. Provide employee training on spending guidelines and negotiate favorable supplier contracts to optimize costs.

Write-offs

Write-offs are important in accounting as they represent an obvious depreciation in the value of something. From a business perspective, a write-off is basically something that was purchased that, for some reason or another, will not yield a return on the investment or in other words, a loss. Imagine a pallet of laptops arrives to you and a third of them are broken beyond repair. You would be hard-pressed to sell the undamaged laptops at a high enough margin to make up for the damaged laptops.

By writing off damaged inventory, you are accomplishing two things. First, you now have a legitimate reason to record a reduction in the net income (i.e., retained earnings) of your business. Second, if you have shareholders, their equity would decrease on the balance sheet as a result.

Advanced Planning is Paramount

Thorough planning is absolutely pivotal in succeeding in business. This applies largely to the supplies and equipment necessary for your business to function optimally. Previously in the article we talked about purchases and how they’re best planned for in the first quarter of the financial year.

What a lot of small business owners don’t know is that there are so many things that qualify as tax deductible. These include the cost to maintain a home office, Internet and phone bills, health insurance premiums, travel, vehicle use, education, startup costs, advertising and many other aspects deemed essential to the successful operation of your business. By planning for these in advance you will make life easier for you, or your accountant if you’re using one.