No one likes taxes, but if you’re a small business owner, this cumbersome activity can be stressful. Small business owners are tasked with a lot more work for tax season, meaning long days and nights surrounded by budgets, receipts, and spreadsheets.

Want to get a head start on your tax season? Focus on business taxes all year long. Preparing for tax season strategically means handling tasks related to your taxes throughout the year, so you can have a stress-free deadline.

What Is Strategic Tax Planning?

Tax planning is an analysis of your financial situation or a plan to make sure that each aspect of your tax situation works cohesively to pay the lowest tax amount possible – legally. This is what it means to be tax efficient with a lower tax liability.

With this approach, you plan throughout the year to reduce the amount of taxes you pay within a period of time. You must plan this all year, however, and particularly in the middle of the year to have enough time to implement new strategies as needed.

Benefits of Strategic Tax Planning

There are numerous advantages to strategic tax planning, especially for small businesses like LLCs or a sole proprietorship in California.

Reduce Liabilities

Your tax plan should focus on reducing your liabilities to avoid overpaying taxes. To do this effectively, you have to have time to prepare your taxes and avoid common mistakes. Often, small business owners end up over-expensing themselves and end up paying far more than they need to.

When you’re preparing for taxes throughout the year, you can reduce payable taxes by deducting your expenses from your income and gain more control over when you pay. For example, if you have revenue running into the end of the year that would put you in a higher tax bracket, you could spend it on business expenses or push it into the new tax year to reduce your income.

Stay Current on Tax Laws

Tax laws change all the time. The COVID-19 pandemic changed a lot of things when it comes to taxes, and for small business owners, those deadlines and new requirements can be a lot to keep up with.

Having a plan in place for your taxes helps you stay current on any changes that come around so you can prepare for them. You’re also at a lower risk of noncompliance with regulations that are new or updated, meaning fewer errors on your return, a lower risk of audit, and a lower tax bill.

Understand Your Financial Situation

With financial visibility, you have a clear vision of your business’s financial situation to make strategic decisions about investments and spending. You’ll see how your business’s revenue waxes and wanes throughout the year, so you can prepare for times of low or high cash flow.

Having a clear picture of your spending also helps you prepare for deductions and save money, which you can then reinvest into your business to fuel future growth.

Tax Planning Strategies

Take a look at these strategies to keep taxes in the forefront throughout the year:

Track Spending and Do Budget Check-Ins

You can’t truly prepare for tax season if you’re not tracking your spending throughout the year and noting fixed and variable expenses. Waiting until the tax season rolls around makes it much more difficult to record your expenses accurately, but if you do it along the way, you won’t make many errors.

Budget planning check-ins are one of the best ways to keep up with your spending. You’ll pay attention to your spending habits on a schedule, or if you prefer, you can use an app to track your expenses for a clear view of your possible deductions.

Keep Business and Personal Money Separate

However you choose to track spending, make sure you’re keeping your personal spending and your business spending separate. You should have separate business and personal bank accounts for checking and savings, but if you don’t, that’s your first priority. You may also want a business credit card for some financial cushion.

Keep Up with Deadlines

There are several tax deadlines throughout the year that are important for small business owners. Keep yourself on a schedule with the deadlines by tracking them on your phone or calendar.

Your monthly or quarterly expense check-ins should fall somewhere near these tax deadlines to ensure that you’re prepared for payments you need to make. Staying organized will help you tremendously around tax time.

Use the Qualified Business Income Deduction

The qualified business income deduction (QBI) offers a tax deduction for up to 20% of the share of the business income for pass-through business owners, such as an S Corp in California, an LLC, or a sole proprietorship. These business entities have profits that flow through to the owners to be taxed under individual income tax.  

Include Employee Bonuses and Retirement

Employee bonuses not only keep employees motivated, but they offer tax benefits for your business. You must finalize bonuses by the end of the year and pay them within a few months to qualify, however.

Retirement plans for employees also reduce your taxable income. Employee 401(k) accounts allow you to deduct your employer contribution before the end of the year, for example.

Invest in Tax Software

Tax software is a huge help come tax time. You can automate your accounting tasks and keep your expenses and other documents stored safely in one secure location, which gets you ready for tax season.

For example, predictive accounting software helps you manage your taxes throughout the year to claim deductions, pay your estimated quarterly payments, report major events, and report your income and expenses when they happen, reducing future mistakes that may occur.

Get Ready for Tax Season

Tax time is stressful enough, so no one wants to be rushing around to make the deadline. Business taxes are often more complicated, so you can miss out on big deductions if you’re not prepared in advance. Planning for taxes all year long gives you a comprehensive view of your business’s financial health and prepares you to breeze through tax time.

Author Bio

Shahar is a tax and accounting expert with over 20 years of experience in the field. He is an entrepreneur and known as The Tax Guru on the west coast. Shahar moved to Seattle from Israel and founded, scaled, and sold a leading tax and accounting firm in the Seattle Metro area. Over the years, he served thousands of business owners and perfected the playbook for self-employed tax strategy. That’s why he founded Formations, to make sure the self-employed never overpay on taxes again.