Date of Posting : June 28, 2020
Tax planning can help vastly reduce the taxes owed, especially for small businesses. It is often confused with tax-preparation, but they are two very different things. While tax-preparation is getting your taxes arranged for quarterly or annual filings, tax planning helps you strategize ahead of time what needs to be filed and what are the records to be kept. It entails the careful consideration of deductions and credits that can be incurred by the business through the year to reduce the tax burden.
A certified public accountant (CPA), or tax advisor, can help you make considerable savings through small business tax planning. One of the primary roadblocks for small businesses is that the owners often have to multitask- heading management, marketing product development, and accounting as well. As a result, they end up treating the managerial and accounting aspects as a chore and seldom afford it any time. Tax planning is treated as an accompaniment to tax preparation and relegated to a year-end exercise. This defeats the entire purpose of the activity and barely has any impact. This becomes all the more significant when the tax is cash-based and timing of cash receipts and vendor repayments are a significant factor. Apart from this, it is also important to have the business registered as a sales tax vendor and prepare the requisite forms in order to avoid possible tax liabilities.
Cost of goods sold, occupancy cost, taxes and wages, travel, insurance and marketing all fall into common categories for tax deductions. In fact, practically everything that supports the daily operations of your small business is tax-deductible. It is thus essential to maintain detailed records of all business-related expenses for audit purposes.
One must always remember, for business tax deductions, it is crucial to prove that the expenses were made for business purposes itself. As a result, original vendor invoices and other proofs of purchase such as receipts need to be kept in order- bank statements are not enough. It is essential to keep abreast of changes in tax laws and in the know of related policies. Being aware yourself, will also ensure you can exact the most out of your tax advisors.
Yes, strategic tax planning is crucial in reducing the amount of taxes owed, but it can`t happen overnight. It happens over a period of time, and perhaps even over a couple of financial years. Regular meetings with your advisors and CPA through the year is essential. As elaborated earlier, it is always a bit of an uphill battle, for which you need to arm yourself sufficiently with your financial statements, projected purchases in the future, possible changes in staffing and such. With all these in your arsenal and your CPA and tax advisors by your side, small business tax planning will help you substantially in reducing the amount of taxes you owe.