In this summary, we will cover
- What is tax planning?
- The importance of tax planning for you as a small business owner.
- The new tax changes for small businesses.
- Since nearly every business transaction is taxed, from finance to investment transactions, tax planning will help you mitigate any liabilities and risks involved in every business process and transaction.
- When you plan your taxes, you arrange the affairs of your business in a way that helps you to either avoid or postpone the payment of tax for that financial year.
- With the new tax changes, small businesses are allowed to claim a deduction of 20%. If, however, the business offers services such as an accounting, law or auditing firm, the deduction is only allowed if the income is below $315,000 for a business run by spouses and $157,000 for a business run by a single person.
- Fixed assets should be reviewed timely. This means that all write-offs for damaged and obsolete assets should be done during the year and the remaining book value can be claimed as a tax deduction.
- If you do not plan for your taxes, you stand the risk of missing on any tax benefits and deductions that apply or you might miss tax payments, which can lead to arrests for tax evasion.
Tax planning is when you arrange the affairs of your business to help you capture as well as enjoy the benefits of tax laws. Apart from this, with tax planning, you are in a position to mitigate any liabilities and risks that might affect your business. By doing this, of course, you will be able to find the most effective solutions to such risks and liabilities. Because almost all business transactions are taxed, from investment to financial transactions, you need to plan for taxes as a business owner. The risk of not tax planning could lead you to facing tax evasion charges because you missed to pay taxes or file the returns and with-held taxes. Another risk could also be missing on tax advantages that your small business is allowed to enjoy.
In short, from tax planning, you will benefit in the following ways:
- You will maximize tax relief or any tax credit available.
- You can reduce the tax payable by deducting some expenses from the income earned.
- You will have greater control over when to pay the taxes.
With the recent tax changes, small businesses can get a tax deduction of up to 20%. This, of course, applies if your small business meets all income requirements. There is, however, a limitation to this limitation. If you and your spouse run a business that offers services such as an audit, accounting or law firm, your business can only qualify for the 20% deduction if the taxable income is less than $315,000.
If you run such a service business alone you can only claim a deduction if taxable income is below $157,500. Knowing this is important because you will be aware of how much you can save based on the new tax laws.
Some of the business planning strategies to consider include:
- Capital gains tax- with the help of a tax planner, an auditor or an accountant, you can calculate your sales and to whom they were made. This way, they will be in a position to advise you what you have in your financials that qualifies for tax exemption.
- Stock Taking- it is important to do a stock count by the end of the financial year. This is important in regards to your tax planning because you will know what to write off or write down to the specific realizable values. Any obsolete, damaged or old stock can be written off or down. It is important to know that this is an expense to your business. Therefore, by writing off or down such stock values, you will reduce the business income to be taxed.
- Accrual of expenses- if your business accounts for its expenses on an accrual basis you may consider accrual of any additional expenses incurred but are yet to be claimed. This way, you will be able to claim additional tax deductions in the current reporting period. Some of the expenses to consider include rent paid, salaries and wages and any commissions owed.
- Green tax credits- this involves taking advantage of various federal programs in place in a bid to encourage green projects. A good example of a green project to take advantage of is the use of alternative energy for all your energy consumption. This can be in form of installation of cooling systems or heating systems. All you need to do is go through the green tax credits to see those that enjoy tax credits and follow all the required guidelines when implementing any.
- Investments- does your company invest any funds? If the answer to this is yes then you need to look at your portfolio or hire a finance or investment professional to do it for you. The main focus on this will be whether there are any investments that made a loss so that you can offset with any gain from other investments within the reporting period. If you have held these investments for more than a year, then you need to consider capital gain taxes on investments.
- Tax deferment- deferring tax payments for that financial or reporting period means that the income tax will be paid in the following period. This means that your tax burden for that reporting period is reduced. To achieve this, delay payment of invoices to the following year if you are using the cash method of accounting for your reports. If you are using the accrual basis method, defer your tax payment by postponing delivery of goods and services to the following financial year or reporting period.