Top Reasons to Start Year-End Tax Planning Right Now
Having a busy business can make tax season difficult to manage. When you have so many responsibilities on your plate, you may want to put taxes on the back burner. However, there are lots of reasons to start thinking about year-end tax planning now.
Why Is Year-End Tax Planning Important?
“Tax season” implies that business owners should think about taxes during certain months of the year, but in reality, tax planning should be something they consider all year long.
When you are aware of tax planning, you can make decisions throughout the year that benefit your business by potentially increasing your deductions and decreasing your tax liability. This is especially true at the end of the year. So don’t wait. Get started today.
Here are the top reasons to start year-end tax planning now:
1. Make business decisions that affect tax liability while you still can.
As December 31st approaches, so do your chances of making business decisions that may affect your tax liability. In some cases, once the new year hits, you lose opportunities to make adjustments that can affect your taxes.
When you plan ahead, you have time to make business decisions that will affect your taxes.
2. Prepare a projection to see what you might owe.
When you start year-end tax planning early, you have time to create a tax projection. A tax projection estimates your potential tax liability for the year. Using this information, you may decide whether you need to take any action to affect the amount owed and, if so, what choices you should make.
Additionally, it can help you determine how much money you should put aside for taxes.
3. Decide if you should increase spending before the end of the year.
By boosting spending, you can reduce your tax obligation. Use your tax projections to decide whether to increase your spending before the year is out. For instance, if you think profits will be greater this year than the next, you might want to take more deductions this year.
If you determine you want to increase spending, you have time to:
- Stock up on products and inventory you know you will need next year.
- Pre-pay for services or fees that will be due after the first of the year.
4. Decide if you should defer income until next year.
You can adjust your tax liability by raising or lowering your income, just as you can change it by increasing or decreasing your spending. Assess whether you should delay income collection as part of your year-end tax strategy.
For example, if you want to have less tax liability for the current tax year, you may want to postpone income until the next calendar year.
5. Identify opportunities to decrease tax liability.
When you begin year-end tax planning early, you have more time to think of ways to lower your tax obligation and to execute tasks necessary to qualify for a credit or deduction. Here are a few examples:
- Bad Debt: Take time to go through your accounts to identify outstanding invoices that are likely to not be paid. Plan to write off any bad debt.
- Old Equipment: Go through your equipment to identify items that may be obsolete and require replacement. Purchasing replacement equipment this year can help to reduce your tax liability by creating a deduction this year.
- Employee Bonuses: The end of the year is a great time to show appreciation to your employees — while reducing your taxes. Bonuses to employees are always tax deductible as business expenses. Bonuses to shareholders and owners come with different rules, but can be deducted in some cases.
- Employee 401k: Setting up and contributing to a 401k plan for your employees can benefit them and you as you can claim a tax credit for setting up retirement plans for your team.
- Energy Efficient Property: Tax law includes possible deductions for businesses with energy-efficient property. Commercial property updates to energy-efficient HVAC, hot water, and lighting can lead to a deduction in some cases. Purchasing alternative and hybrid, energy-efficient vehicles may also lead to a tax deduction.
6. Figure out what you should do based on changing tax rules and regulations.
The tax code may change as a result of new leaders and legislators. Planning ahead allows you to glimpse into the future and determine potential changes. Several things to consider when you anticipate future new tax policies.
- Will taxes go up or go down next year? Determine which year would be better to have more liability.
- What new tax rules were added, will be added, were revoked, or are likely to be revoked? Consider how changes to the tax code may impact your plans and opportunities.
7. Decide if you need to change your tax status.
As tax season draws near, small businesses might even choose to change their tax status in some circumstances. A change in tax status from a sole proprietorship, partnership, S corporation, or C corporation may be advantageous as a business expands or changes.
Planning your taxes ahead of time will give you more time to determine the benefits of changing your status as well as more time for the actual process of changing your status.
It’s not too late to plan ahead
Tax preparation should a year-round activity for small businesses. Your company should periodically assess, examine, and use it to inform business decisions throughout the year.
It’s not too late. Check out what you can do right away to help your company by starting your year-end tax planning now. Call (918) 600-2299 or schedule a call today.