Why Small Business Owners Should Think About Taxes Year-Round

What is strategic tax planning?

Strategic tax planning is when a business creates a plan to minimize the amount of taxes it pays in a given period. You should start planning formal tax-strategy sessions in the middle of each tax year to give yourself ample time to create and apply your strategies before key tax deadlines. 

Every entrepreneur should have a basic understanding of the provisions of the tax code and work with a certified public accountant (CPA) when possible to implement the correct individualized strategy. Below, we share tips for ensuring you have the best business tax-planning strategy year-round. But first, you should understand the benefits of doing so.

Why small business owners should think about taxes year-round

Strategic tax planning sets up small business owners for success, putting them in the best possible position for growth. Here are some of the key benefits of thinking about your taxes year-round.

Strategic tax planning mitigates your liabilities.

It’s essential for small businesses to create a tax plan to mitigate their liabilities, especially when these transactions are taxed. By giving yourself time to prepare for your taxes, you can reap these benefits:

• Avoid common mistakes
• Maximize tax relief
• Reduce your payable taxes by deducting your expenses from earned income.
• Have greater control over when you pay your taxes

According to Anthony Mezzasalma, a CPA and partner at Mezzasalma Advisors, one example of poor tax planning would be to take in a large amount of revenue before the end of the year that could potentially move your business into the next tax bracket. 

Instead of paying more taxes because of that revenue, good tax planning would have your business receive that money at the start of the new year to mitigate your liabilities. If delaying revenue isn’t an option, consider spending some of that money on business expenses.

“[Say] a client comes to me in December, and they’re like, ‘I landed a big client, and it’s looking like I have more income [this year]. What can we do about it?’” Mezzasalma told us. “If it’s December before [the] end of year … maybe you accelerate your expenses and buy that piece of equipment you were thinking about buying, or you defer some revenue. There’s less you can do after the fact.”

Strategic tax planning helps you stay compliant with evolving tax laws.

Maintaining a strategic tax plan helps you stay updated on tax law changes. Since the pandemic and its subsequent effects on the economy, deadlines and tax requirements for small businesses have been changing constantly. Having a tax plan helps you understand what has changed and lets you reassess your strategy accordingly. 

With a clear understanding of current tax laws, you won’t risk noncompliance with new or updated regulations, and you’ll minimize the number of errors on your tax return. In turn, you won’t have to worry as much about facing an audited return or owing more money down the line.

Strategic tax planning reduces stress and errors around tax time. 

Proactive tax planning throughout the fiscal year can help you avoid stress and minimize potential errors during tax-filing season. By consistently maintaining organized financial records, meticulously categorizing business expenses and adhering to a regular bookkeeping schedule year-round, owners can alleviate the last-minute burden of reconciling disorganized data. 

This systematic approach not only fosters a sense of control over the tax-filing process but also reduces the likelihood of costly errors or penalties arising from hurried data entry or overlooked deductions.

Strategic tax planning helps you maximize tax deductions.

Speaking of deductions, adopting a year-round approach to tax considerations helps small business owners maximize their deductions. By maintaining consistent awareness of regulations and requirements, business owners can strategically plan their expenses to capitalize on available deductions throughout the year. This proactive mindset allows for thorough documentation and categorization of deductible expenses, thereby ensuring that no legitimate deductions are overlooked or missed. 

Additionally, staying up to date with evolving policies enables business owners to leverage timely deductions, such as those related to equipment purchases, office supplies, professional fees, business travel or charitable contributions. 

Strategic tax planning enables growth.

A solid tax-planning strategy gives you a better understanding of your business’s financial health so you can make sound financial projections and investments throughout the year. Additionally, it helps you become more familiar with the ebb and flow of your business’s operations.

With proper tax planning, you can capitalize on any deductions you might be eligible for so you can save money and further fund your company’s future.

Business tax-planning strategies

Here are some of the ways businesses can ensure they stay on top of taxes all year long.

Use the right accounting software.

One of the best ways to stay on top of your taxes is to use business accounting software. Here are a few of our picks for the best accounting software for business owners.

• Intuit QuickBooks Online: QuickBooks Online is great accounting software for small businesses because of its wide range of features, variety of integrations, affordability and excellent reputation. Its features include professional invoicing, expense tracking and cash flow management. To learn more, read our in-depth QuickBooks Online review.
• Oracle NetSuite: Oracle NetSuite can help you manage billing, reporting and manufacturing in one centralized dashboard for enterprise resource planning. This vendor offers a tax engine that provides domestic and global tax management, processes taxes according to local laws, and supports all currencies and exchange rates. See our full review of Oracle NetSuite for more information.
• FreshBooks: FreshBooks makes it easy for business owners to create professional invoices and receive payment quickly. The software helps you run profit and loss reports, sales tax summaries, and accounts aging and expense reports. Check out our detailed FreshBooks review for additional features.
• Zoho Books: Zoho Books helps you track bills, manage vendor credits and add reporting tags to transactions. It offers a ton of features at an affordable price for businesses that don’t require a complicated accounting program. Our Zoho Books review goes into more detail about the software’s features.

Automating your accounting tasks with high-quality software and having all of your financial documents in one place can be helpful come tax season. By investing in accounting software, you won’t have to worry about untracked expenses or missing documents.

Track your spending, and have regular budget check-ins.

Aim to track all of your spending throughout the year so none of your fixed and variable expenses are hard to pin down once tax season rolls around. Noting expenses when they happen ensures you don’t forget them at the end of the year.

“If you’re staying on top of things during the year, you can more easily identify and act on opportunities that you can’t otherwise act on after the year’s over,” Mezzasalma said. “By keeping your books up to date, you can realize how well you’re doing that year and react accordingly.”

For some businesses, it helps to have monthly expense and budget-planning check-ins. For others, it’s best to go through business spending every week. Whatever the time frame, get on a schedule to track your business’s spending habits consistently. You can also use an app to track your spending. If you don’t track your spending and expenses and you end up making mistakes on your return, you could be hit with fines later, or you may lose sight of possible deductions that would have helped when you were filing your taxes. 

Keep your business and personal expenses separate.

Regardless of whether you’ve been tracking your spending regularly, ensure that you always separate business expenses from personal expenses to avoid confusion. If you haven’t done so already, set up a separate bank account for your small business and make company purchases using your business credit card. [Learn how to apply and qualify for a business credit card.]

Keep important deadlines top of mind.

Stay aware of crucial deadlines throughout the year to hold yourself accountable. Note all tax deadlines, and don’t be afraid to set deadlines for yourself. If you want to have monthly or quarterly expense check-ins, keep those on a calendar, and set deadlines for tracking your expenses in conjunction with your check-ins. Keeping important dates and deadlines organized will help you at tax time.

Hire an accountant or business tax professional.

If you find taxes for your small business overwhelming or confusing, or if you just want another resource, consider hiring an accountant or other tax professional to help. Tax professionals are highly knowledgeable and can assist as much or as little as you need. They can also help hold you accountable during the year to maintain smart and legal business tax practices and finances. Additionally, a tax professional can help you stay aware of hidden fees and important documents.

Take advantage of the qualified business income deduction.

The qualified business income deduction provides pass-through business owners a deduction worth up to 20 percent of their share of a business’s income. However, it involves regulations and limitations.

Pass-through business entities include sole proprietorships, partnerships, limited liability companies (LLCs) and S corporations that are not subject to corporate income tax because their profits flow through to owners, who are then taxed under the individual income tax.

If you own a specified service trade or business (SSTB) and your income exceeds a certain threshold, you’ll lose out on this deduction. An SSTB can be any service-based business, such as a law firm, medical facility, accounting firm or investment firm.

Consider employee bonuses and retirement benefits.

Awarding employee bonuses is an excellent way to motivate and incentivize your employees to work harder, and it’s also tax-deductible for your business. The IRS requires you to finalize bonuses by the end of the year and pay the bonuses within two and a half months of the end of the year. You also must pay the bonus directly to the employee, not to a sole proprietor or LLC, so the bonus remains tax-deductible. 

Similarly, you can reduce your business’s taxable income by setting up one of the best retirement plans for your employees. If your business starts a 401(k) plan for an employee before the end of the tax year, you can deduct the contributions made to the plan. 

Skye Schooley and Andrew Martins contributed to this article. The source interview was conducted for a previous version of this article.