Tax season is a grueling time for most business owners as they look over budgets, organize spreadsheets and burn the midnight oil to
You didn't start your own business to be chained to your desk, counting every penny. But if you don't take a proactive approach to your tax filing, that's exactly what will happen. Instead, prepare for your self-employment taxes all year long with good recordkeeping. The early effort will pay off in less stress, increased accuracy and a smoother tax season. If that's not enough, planning early can help you
What does it really mean to be tax happy? For me, that's having a smooth and stress-free tax season because I invested the time into tracking my finances throughout the year. Then, when everyone is scrambling on April 15, I can kick back and relax.
Here are proactive tax planning strategies and tips that will help you stay committed and up-to-date throughout the year.
Get organized — and stay that way
Taxes aren't a fun time for most people and non-fun times are when we're all more likely to procrastinate. But excuses add up — the work in front of you is more urgent, the deadline is far off, you don't need to worry about it … yet? Then the weeks and months go by and at crunch time you're no better prepared than you were a year ago. I'm a procrastinator so I block off time and set reminders for my tax-related tasks in my schedule at the end of the year.
The real secret weapon in effective tax planning is good recordkeeping. The more organized you are, the fewer errors and less wasted time you'll deal with at filing time. Even yearlong planning won't help if you don't have those records in order. There are many ways to handle your accounting, including manual methods (not recommended), working with a tax advisor, or relying on industry-specific accounting software.
If you're new to accounting software, the end of the year is the perfect time to implement a new solution and start the new year off right. If you already have one that isn't working for you, then find an option that suits your needs.
Bird's-eye view
Yearlong planning not only gives you a jump on April 15, it gives you a bird's-eye view of your practice's financial health. If you're a solo practitioner, reviewing cash flow, profit and loss statements and your balance sheet when you have the time to concentrate on them can yield benefits such as keeping track of accounts payable and receivable, understanding your revenue ebbs and flows and identifying cash flow issues. If you have a small RIA, it may be beneficial to change your business structure to an LLC or
Go ahead, buy that new computer
Maximizing deductions is an important part of saving money on your taxes. The end of the year is a great time to make essential business purchases, such as a new computer or printer or software to offset your
Even if you don't have pressing business purchase needs right now, buying before the end of the year will help you get more out of the current year's deductions. Many miss out on deductions simply because they're not prepared. The end of the year is the best time to evaluate your tax deductions and see what you may be eligible for. Some of the common deductions for business owners include travel expenses, vehicle cost and expenses for business use, employee expenses (if you have employees), home office expenses and charitable contributions.
Keep in mind that some of these deductions are
Look for bonus depreciation opportunities
If you've purchased technology, equipment, vehicles or other assets for your solo practice or small RIA, you may be eligible for bonus depreciation, which accelerates depreciation by allowing you to write off a percentage of an eligible asset's cost in its first year of purchase. The remainder is written off as standard depreciation over multiple years until it's phased out.
Not all assets are eligible for bonus depreciation, however. If you're not sure, consult with a tax professional.
Defer, accelerate
If you can swing it, deferring your income can reduce your tax liability. This will allow you more time to pay taxes on that income and may lower your tax bracket to give you a better rate.
Your accounting method will affect how you defer income. If you use cash-basis accounting, you can send invoices late or adjust the due dates for the next year. Of course, this means that you won't actually receive that income until that date, so only defer your income if you don't need the revenue now.
You can also accelerate income to the current tax year if you're in the right financial position. For example, if you expect to be in a higher tax bracket, accelerating your income allows you to collect more payments in the current year, ensuring that more income is taxed at the current rate.
Embrace predictive accounting
Predictive accounting software is a great way to manage your taxes and maximize your tax savings all year long. You can track everything related to your taxes — from bookkeeping to tax payments to comprehensive financial reports — so you can focus less on taxes and more on handling your day-to-day responsibilities. Good predictive accounting software can help you stay on top of the important tax preparation tasks throughout the year. For example, you can pay your estimated taxes, report a major life event, or report income and expenses to the IRS.
