Tax time. Yes, it’s “busy season” for us accountants, but it’s also the time of year when people outside the four walls of our office building are laser focused on the importance of tax planning. If tax strategies are top of mind for your small business, read on to find out a few simple ways to take a more proactive approach to Tax Season.
As a CPA with more than 15 years of experience working with business owners in a wide range of industries, I’ve seen the rewards of tax planning done well, and I’ve seen the challenges that can arise when it’s treated as an afterthought. In many cases of the latter scenario, the “afterthought” approach wasn’t taken because that business owner didn’t take tax planning seriously — rather, it’s typically because tax laws and planning strategies can feel incredibly overwhelming for folks who aren’t familiar with them.
After all, tax laws are complex and ever-evolving. But when thinking about all the advice I’ve given throughout the duration of my career to all sorts of businesses, I’d say the following tips are the most universally applicable. Whether you’re considering starting a new business, you’re already running a successful operation, or you’re ready to scale, the tax tips below can help keep your business on track.
1. Keep clean books year-round. This one may seem fairly straightforward, but you’d be surprised how many times I’ve seen small business owners come to the office with a shoebox full of receipts and no other organizational processes or procedures for their financial records. Going through your accounts to reconcile expenses and transactions regularly will not only make tax season easier, but will also give you a clearer picture of how your business is doing throughout the year. Keeping clean books also ensures that potential deductions won’t be missed or forgotten.
If you’re a little behind on your books and struggling to find time to catch up, start small: Carve out 30 minutes to an hour each week to focus on bookkeeping needs. Once you catch up, keep that block of time in your schedule. Staying on top of this task will save loads of frantic administrative time in the long run.
2. Don’t forget the importance of estimated taxes. Unlike employees, small business owners generally do not have taxes withheld. To avoid penalties with the IRS, be sure you’re making quarterly estimated tax payments.
The general rule is to pay 100% or 110% of the prior year’s tax liability, depending on your income, or 90% of the current year’s tax liability to avoid penalties. Setting aside a portion of revenue in a separate savings account helps ensure there’s enough cash to cover tax payments when they’re due and prevents owing a large balance when you file your tax return.
3. Leverage retirement plans for tax savings. Retirement plans offer a dual benefit, helping business owners save for the future, while also providing immediate tax advantages. Because of this, a SEP IRA, SIMPLE IRA, or Solo 401(k) can significantly reduce your taxable income.
Contributions to the retirement vehicles listed above are tax-deductible, and earnings grow tax deferred. However, as you’re mapping out your plans for the future, it’s important to remember that withdrawals from these accounts will be taxed at retirement.
If you’re managing a team of employees, you also have the option to contribute to employee retirement plans. This not only improves your workplace benefits, making you a more competitive and desirable employer, but can also reduce your taxable business income. For the calendar year 2024, employers can contribute up to $69,000 to certain plans. Depending on the type of plan, contributions can be made until the extended due date of your return — so if this strategy is of interest to you, you may be able to implement a plan that could provide a tangible benefit for calendar year 2024.
4. Don’t forget to consider state and local tax. Most business owners focus on federal income taxes, but state and local tax obligations can significantly impact a small business’s bottom line. Sales tax, income tax, franchise tax, gross receipts tax, and property tax are just a few of the state-level taxes that business owners need to be aware of.
Each state has its own tax laws, and some are more business-friendly than others. Many states have economic nexus laws, meaning that even if you don’t have a physical presence in a state, you may still be required to collect sales tax or pay income tax if your sales exceed a certain threshold to customers in the state. Regularly reviewing state and local tax laws ensures compliance and helps avoid unnecessary penalties or interest.
5. Start preparing for next year now. The best time to start tax planning for next year is today. Businesses that wait until tax season to review financials often find themselves in scramble mode and may even miss opportunities. What’s the best way to prepare? There are a number of ways to approach next year’s tax planning, but three strategies I’d recommend to stay proactive include:
Worried about taxes? You’re not alone.
Numerous studies have shown that small business owners aren’t confident about their tax knowledge. In fact, one study conducted by the Public Private Strategies Institute (PPSI) in 2023 indicated what the organization has called a “small business tax literacy gap.” According to the PPSI survey, 37% of respondents “felt nervous, scared, or bad about filing taxes,” despite the fact that 76% had earned an undergraduate degree or higher. Similarly, a QuickBooks user survey revealed that “less than half (48%) of small business owners are confident they’re paying taxes correctly.”
If you’re uncertain about how best to approach your tax planning, you’re certainly not alone. Hiring a professional to help you navigate the complexities of tax planning may be a great way to alleviate some of that anxiety and ensure you’re not missing opportunities that could benefit your business.
Need help finding a qualified professional to handle your tax planning needs? The membership directory at ChattanoogaChamber.com is a great place to start. Simply search for accountants and bookkeepers and you’ll find a long list of member businesses who can help you, including Market Street Partners (a Smith + Howard company).
- Setting up quarterly check-ins with a tax professional. If you’re meeting with someone regularly, you’ll be able to adjust your tax strategies and identify opportunities as business operations fluctuate throughout the year.
- Reviewing year-end projections. This practice allows businesses to optimize deductions, make strategic purchases, accelerate deductions, or defer income if needed.
- Keeping an eye on tax law changes. Staying informed about potential tax law changes will give you a better understanding of what might impact deductions and credits for the following year.
Better planning, greater peace of mind
Ultimately, the goal of tax planning is to ensure there are no surprises when it comes time to pay taxes. It doesn’t have to be scary. Proper planning helps with cash flow management and streamlines business processes so that you can approach your work with greater peace of mind.
Josh Moore is a Tax Partner at Market Street Partners (a Smith + Howard company).
