With the corporate tax filing extension deadline having passed and a new tax planning season just around the corner, it’s time for all business owners to start thinking about how they can pay less taxes this year.
The truth is that very few business owners do very much at all to try and reduce their income tax bill. Each year, they hand their files off to their tax preparers and call it a day. Then, they are shocked when they find out that they owe the IRS a huge chunk of their business’s profits that year.
Needless to say, this is the wrong approach. Reducing your income tax expense is a key component to maximizing profits. Smart business owners know this, and they work on identifying ways to reduce their tax burden—legally, of course.
Want to pay less taxes and maximize your profits like all of the other smart business owners do? Follow these five simple steps!
1. Prioritize Your Tax Planning
Make no mistake—proper tax planning almost guarantees that you will pay less money in taxes, unless you’ve had a loss in your business. Even then, great tax planning could allow you to recuperate some of that money.
Business owners will often say, “I’m too busy—that’s why I hire a good CPA.” While it’s certainly important to hire a good CPA, keep in mind that there is only so much that your CPA can do once tax filing season rolls around. They can report your information in a way that minimizes your taxes, but since last year is history, options are limited.
Tax planning, on other hand, makes you proactive rather than merely reactive.
2. Call Your Financial Advisor Before Making a Major Decision
There are tax implications with almost every significant financial decision—whether it’s making a major purchase, moving money between accounts, or something else.
One of my clients took money out of his IRA once he turned 59, all because one of his golfing buddies said that he could. Of course, the law states that you need to be 59 and a half to do this.
Come tax filing season, he was subject to penalties and the move ended up costing him more than $5,000. The moral of the story? Always speak to your financial advisor before making any major financial decision. They will steer you in the right direction and help you prevent a major tax blunder!
3. Keep Great Accounting Records
Not keeping proper accounting records is a surefire way to overpay on taxes. To minimize your tax expense, you should be recording absolutely everything—from the cash you spend and the bills you pay to your credit card charges and everything in between.
If you don’t keep strong records, there is simply no way of recalling and proving all of your expenses when filing. Worse yet, you will have no means of defending yourself and your business if you are audited by the IRS.
Remember, only your income is reported to the IRS—not your expenses. This means that the onus is on you to provide the supporting documentation for those expenses and claim your deductions.
4. Start Working on Your Taxes Earlier
If you want your CPA to do the best possible job with your taxes, you need to give them as much time as possible. In fact, if you’re going to wait until April 1st to hand everything off to your CPA, you might actually be better off filing an extension and waiting until May or June.
The fact of the matter is that your CPA needs time to not only file your taxes accurately but also ask you pertinent questions that could help you pay less tax. This simply isn’t possible when your CPA is rushing to meet the filing deadline.
5. Set Tax Money Aside Throughout the Year
If you’ve been in business for a while, you probably have an idea of how much you pay in taxes each year. One of the wisest things you can do is to start setting money aside for taxes on day one rather than trying to come up with the money upon filing.
Whether you make estimated quarterly tax payments or stash the money in an account that you don’t touch, having your tax money on hand could save you a major headache at year’s end.
On a final note, don’t make tax deductions the reason for spending money. You should only make a purchase when it’s going to help your business. A potential tax deduction is just the cherry on top!