Many small-business owners are guilty of ignoring issues around taxation. They wait until it is mandatory for them to file their returns. Yet, tax planning will help avoid the last-minute rush to meet the tax man’s deadlines. It is also an excellent vehicle for reducing your tax bill, by maximizing on credits and deductions available.
What Is Tax Planning?
Tax planning is any activity you undertake to eliminate or reduce your tax liabilities. You work towards enhancing the efficiency of deductions, exclusions, allowances and exemptions. You aim to reduce costs while achieving financial and business goals.
Tax planning helps business owners to focus on investment strategies that will yield results. Most importantly, you have more control over how much you give to the government in the form of taxation.
Tax planning is, therefore, a critical component of running a small business. You need to understand federal tax brackets, different deduction techniques, how to take advantage of tax credits and covering healthcare costs.
There are some excellent guides online and offline that you can use for tax planning. It is, however, crucial that you engage the services of a professional, if accounting and taxation is not your strong point. You want to avoid certain common mistakes that may put you in the crosshairs of the IRS.
Common Mistakes to Avoid In Tax Planning
Small business owners struggle with tax planning due to some avoidable mistakes. Take note of the following and do not fall prey to any of them.
· Registering the Wrong Business Model
You have several options with regards to business models. Such include corporations, sole proprietorship and partnerships. Before registering a business, make sure you understand the tax implications for each model.
- A sole proprietorship has the advantage of the least record-keeping and no requirement for set up with the IRS.
- Limited Liability Corporations help you avoid or limit certain exposures.
- Regular Corporation may place you in a higher tax bracket, so do your research well.
We recommend you consult with a professional who can advise you appropriately. It will help you limit your tax liabilities.
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Poor record-keeping
Small businesses struggle with record-keeping because they find the task onerous. Failing to keep receipts, not recording cash expenditure, mixing of personal and business finances are just some of the issues. It becomes even more frustrating when the time for filing returns rolls around, and the records are not up-to-date.
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Falling Behind On Tax Deposits and Payments
Small businesses, especially those that are just taking off, may face cash challenges. It, therefore, becomes easy for them to fall behind on certain tax obligations. Experts recommend separating tax money from other business money. It ensures that you always have cash for tax available when you need it.
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Staffing Shortcuts
Small businesses may opt to have some staff members on record as independent contractors. Cash payments are a cheaper option than having to deal with payroll. However, if the relevant authorities or IRS catch wind of what you are doing, you could get into serious trouble.
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Not Taking Advantage of Tax Benefits and Deductions
Educate yourself on how best to reduce your tax liability. The government extends certain incentives to individuals and businesses. Deductions and tax credits are part of the incentives, and will significantly lower the amount of money you owe the government in the form of taxation.
How to Save Money with Proper Tax Planning
Every business owner, whether big or small, looks for ways to save money. There are certain benefits you can take advantage of, and we will explore them below.
- Deduct Health Expenses
A small business with less than 25 full-time staff members can benefit from the health care tax credit. You must, however, be contributing to health insurance premiums for the employees. The average salary should also be less than $50,000 annually. Contributions to Health Savings Accounts (HSA) are also tax-deductible.
- Work from Home Office
With technology, more and more people are embracing the work from home model. Other than the convenience of not transiting from place to place, you can also benefit from certain tax advantages.
You will need to prove that you work from home, which should not be too difficult. Business cards, guest logbooks, work and time activity logs, receipts, and invoices are some of the things you will need. You must also show that you have a specific room that you use as the home office.
Let the professionals guide you on how best to take advantage of the work from home office deductions.
3. Charity Donations
Charitable donations are some of the deductions you can make when filing your returns. You can save through:
- Donations to public charities that will qualify you for itemized deductions
- Capital gains tax liability through the donation of long-term assets that have appreciated. You have the option of deducting the market value, or minimizing capital gains tax by up to 20%.
- Estate and gift tax exemption, on the transfer of property to a beneficiary upon your death. As of 2020, the exemption is $11.58 million per individual.
4. Business Meal Deduction
When you take a client out to lunch, it is a fantastic way to build relationships. But, the government also rewards you by allowing deductions for client or employee entertainment. Please note the following:
- You can only deduct up to 50% of client meals and entertainment.
- An employee of the company has to be present during the outing.
- Now may not be the time to order caviar, there is a caveat on how lavish the meal can be.
- Office meals, company parties and retreats are deductibles.
- Business Automobile deduction
Save money by using your vehicle for business meetings. The government allows for certain deductions on expenses accruing due to maintaining or operating the vehicle. Include more than one car in the deductions so that you increase the amount of savings.
The IRS will calculate the mileage due to business use. You arrive at the figure by dividing business miles by total miles you have covered with the vehicle.
If you cover a lot of miles due to work, the standard mileage deduction may give you greater savings. If the vehicle is older, has a lot of maintenance issues or is fuel-inefficient, you may save more by filing your actual expenses than using the mileage rate-card from the IRS.
Make the process easier by keeping proper records of receipts and mileage logs.
Key Takeaway on Saving Money with Tax Planning
As a small business owner, it is critical to incorporate tax planning in your day-to-day activities. You need to put the following into consideration:
- Proper record-keeping of all your financial transactions, no matter how small, will make the filing of the returns easier
- Avoid common mistakes such as poor record-keeping, falling behind on tax payments and not taking advantage of money-saving measures
- Educate yourself on tax planning processes so that you never find yourself in trouble with the IRS
- Save money with deductibles from health expenses and working from home. Charitable donations, business client entertainment and personal automobile use, can help you save cash.
Final Thoughts
Business owners put off filing tax returns to the very last minute. For many of them, it is a tedious, time consuming and lengthy process. Yet with a little planning filing returns is not as difficult as many think it is. Tax planning helps put in place strategies that can simplify the process.
The rule of thumb is to start early,keep good records and take advantage of the accounting software. Engage the services of taxation experts to ensure everything is above board.
The slightest mistake can be costly for you and your business. With the right tax planning strategies in place, you are sure to see positive returns every single time. You save time and money that you can invest back into your business.
