Okay, so you have worked really hard to generate a profit in your business, great job! However, welcome to America and meet your new friend the Internal Revenue Service (IRS).
If your business is incorporated and has generated net income you can expect to pay taxes on your hard-earned profit.
Are you ready for that?
Here is the good news.
At New Economy, we’ve created a process and tools to help you keep more of that hard-earned profit in your pocket which we will talk about. As we are entering into the fall, now is the time to pay attention to this.
We want to help you gain control of your finances to make smart decisions to build and grow your Company.
In this article, you will learn about:
- Our repeatable process to mitigate and plan for your small business taxes
- Top small business tax savings strategies
- Top Takeaways
Let’s dive in.
What is the Repeatable Process to Mitigate Small Business Taxes?
First off, we believe that every business should have some core accounting and financial processes and systems. These processes and systems should be geared toward providing you with timely and accurate financial information to make smart decisions.
Before we talk about mitigating taxes, let’s have a quick refresher on the tools that need to be in place to provide the visibility needed. Or you can refer to our blog post on the Top 4 Financial Tools for Success.
Financial and Accounting First
1.Month-end close – The goal of the month-end closing process is to ensure that your numbers are accurate. This is important as you’ll need to leverage your month-end financials to build and grow your business. This process is usually owned by a more experienced team member, like a controller. The deliverable is a set of accurate business financial statements.
But how does this relate to taxes? We need to understand how the business is performing from a profitability perspective. So as of September 30th do you have net profits? This is an important question to answer.
2.Financial model – The goal of this process is to provide you with a flexible picture, based on your assumptions, of the future financial condition of the business. Further, it will provide you with a road map of where the business is headed. This process is usually owned by a more experienced team member, like a CFO. The deliverable is a set of projected business financial statements to give you a sense of how your business is expected to perform.
So back to our example above, if the monthly close is showing a profit of $200,000 as of September 30th, what is projected to happen over the 4th quarter? Maybe the profits will increase or maybe they will decrease.
So the idea is to get a glimpse of how the business has performed to date and then predict financial results through the end of the year. Back to our example:
- $200,000 of profits as of September 30th
- $50,000 of profits expected in the 4th quarter
- $250,000 of profits that are taxable income
With this information, we can eliminate surprises and work on tax planning. Every business owner should know where they stand from a financial standpoint at all times.
Now, onto Taxes
Okay, so now to taxes.
At New Economy we think about taxes year-round, yup you heard that right.
We have a dedicated team member assigned to every client who engages in ongoing tax planning. This gives our business owners peace of mind.
We love this meeting cadence as it allows our Tax Expert to stay up to date on the happenings of the business.
In case you were wondering, here is a glimpse into our tax process:
- Tax Expert reviews the Monthly close and Financial projections
- Tax Expert identifies risks and opportunities driven by the IRS
- Tax Expert has a quarterly Client Tax Zoom to get a business update and share risks and opportunities
- Tax Expert offers up key takeaways and action items
The goal of the above is to eliminate tax surprises and to stay on top of taxes year-round by leveraging our meeting rhythm process.
How often do you talk to your tax person?
We believe it should be on an ongoing basis.
- Around the September time frame, the Tax Expert schedules a Zoom with the client to determine the financial performance of the business
- Assuming profitability, the Tax Expert will run a Tax Projection. The tax projection is a “what if” scenario-based tool with the goal of making decisions to minimize taxes
- Based on the advice of the Tax Expert, the client is able to make decisions before year-end to take advantage of tax strategies to minimize taxes
As you can see, we are in lock-step with our clients. Before the end of the year, we devise a plan that can be executed to mitigate taxes.
Our Tax Expert is not checking in just annually at the time of the tax return filing, but they are keeping up to date on happenings to best advise our clients.
The goal is to keep more money in your business so you can invest in your business.
Okay, so what about some strategies?
Small Business Tax Savings Strategies
Below, we’ll rifle off a list of 15 small business tax savings strategies, but remember, your specific situation and circumstances matter.
Hold tight, here we go.
- Review your entity type to ensure it makes sense. Utilizing the right business entity (for your specific business) may significantly improve the tax efficiency of your business.
- Review your accounting method to make sure it makes sense. Consider whether you should be a cash or accrual basis taxpayer. This can make a big difference in terms of when income or deductions are reported.
- Establish a retirement plan for your employees. This is a great way to attract and keep talented employees. Further, it is a way to capture some extra tax deductions.
- Establish a health insurance plan for your employees. This is a great way to attract and keep talented employees. Further, it is a way to capture some extra tax deductions.
- Establish a general fringe benefit plan for your employees. This is a great way to attract and keep talented employees. Further, it is a way to capture some extra tax deductions.
- Bonus out at year-end. This one speaks for itself. Who doesn’t love a year-end bonus? And you get the tax deduction.
- Prepay expenses at year-end. If you have the cash, spend some of it. It’s possible you can buy some extra deductions.
- Max out retirement contributions at year-end. Your contributions are pre-tax. Take advantage of it and max it out.
- Establish a match on employee retirement contributions. Keep your employees happy and grab this extra tax deduction.
- Prepay bonuses at year-end. More employee happiness and grab this extra tax deduction.
- Buy assets and accelerate depreciation. Grab that laptop, vehicle, or piece of equipment before year-end and let’s accelerate the depreciation and grab an extra tax deduction.
- Write off bad debts. Have a customer or two that will not pay? Write the balance off and grab an extra tax deduction.
- Ensure you’re grabbing all the credits out there like R&D. There are lots of tax credits out there. Don’t miss them, they offset your taxable income.
- Defer taxable income. Play the game. Defer income to next year and pay taxes on it next year.
- Consult a tax advisor. A tax advisor is different from a tax preparer. A tax advisor will get to know you, your goals, your business, and help you make smart decisions to achieve your goals. Everyone wants to minimize taxes, right?
The above list is not all-inclusive. Further, the facts and circumstances from business to business differ and are always subject to changes.
The best thing we feel you should do is stay on top of this and talk to your tax advisor on a regular basis.
Here are three key takeaways:
- Make sure that you have access to financial information on a monthly basis. By reviewing and analyzing your financial information you can begin to get a sense of tax implications well in advance of the tax filing deadline. Remember, the goal is not surprises and minimizing taxes
- Review your tax situation on a quarterly basis. Ask yourself:
- Should you be making estimated tax payments?
- Are you taking advantage of changes to tax laws?
- Are you making decisions that will reduce your tax liability on an ongoing basis?
- Engage with a tax consultant. This is someone who will help you out with takeaways 1 and 2. You have worked so hard to generate a profit. Now let’s find a way to keep the hard-earned cash in your pocket and not Uncle Sam’s.
New Economy Team Members are Experts in Accounting for Entrepreneurs
If identifying ways to decrease your taxes is not in your skill set or you want to gain control of your finances to make smart decisions to build and grow your business, New Economy is an excellent partner.
We’ll help you get your accounting and taxes done, and done right.
Schedule a time to meet with our Founder, Jeff, and discuss how we can add value to your situation.