Finances and strategic tax planning shouldn’t be a once-a-year event. Just like you wouldn’t put off saving for retirement or making a will, you shouldn’t wait until the last minute to start thinking about your taxes. The earlier you start planning, the more time you have to take advantage of opportunities and avoid mistakes.
If you own a business, it’s crucial that you understand how tax planning works, how to manage it correctly, the downsides of not considering this task in your plan of action, and more. So, to avoid risking your company’s future, here’s everything you need to know about tax planning. Keep reading!
Understanding Tax Planning
What Is Tax Planning?
Tax planning is the process of organizing your finances in a way that minimizes your tax liability. This may involve making strategic decisions about how and when to income, save, and invest money. Tax planning can help you reduce the taxes you owe each year, freeing up more money to save or invest.
Tax planning should be a crucial part of your overall financial planning. If not, your company could face negative situations that no business owner expects.
What Considerations Does It Cover?
Planning for taxes involves several factors; some of these are the timing of income, the timing and size of purchases, and the preparation for additional expenses.
Selecting investments and retirement plan types must complement the tax filing status and deductions to achieve the best results.
Special Considerations You Should Know
Saving through a retirement plan is a common strategy for effectively lowering taxes. A traditional IRA contribution can reduce gross income by the amount given.
A filer under the age of 50 that meets all requirements for 2021 and 2022 might contribute up to $6,000 to their IRA. If they’re older than 50, they should contribute $7,000.
7 Most-Used Tax Planning Strategies For Businesses
1) Utilize Depreciation
Depreciation allows companies to recover what they spend on capital expenditures and avoid paying taxes on it. This expenditure lowers taxable income, which has a negative influence on the overall tax strain.
The Tax Cuts and Jobs Act allows businesses to depreciate 100% of specific types of property in the year they are acquired.
The 100% bonus depreciation rule is currently active until 2022, after which there will be a phase-down where the bonus depreciation percentage decreases 20% each year from 2023-2026. Accelerating deductions into years with higher tax rates might result in long-term savings.
2) Utilize Charitable Contributions
You can schedule and arrange your contributions to charities to optimize your tax benefits. Different types of contributions you might want to consider are:
- Cash donations
- IRA donations
- Charitable remainder trusts
- Stock donations
- Private foundations
- Donor-advised funds
The type of gift, the sort of asset it’s given, and the time it’s provided are factors that you must carefully consider. Note that valuations (and other tax forms) might sometimes be necessary to support a contribution deduction.
3) Accounting Method Planning
Tax accounting planning mainly focuses on generating tax benefits by getting tax deductions faster and deferring taxable income. It aims to minimize the amount of taxes owed in the current year.
However, taxpayers frequently ignore the advantages of accounting method planning when statutory tax rates don’t change. This is due to the fact that moving income or expenditure items into various periods don’t always result in permanent tax savings. Instead, it merely results in a timing benefit that will reverse in future years. On the other hand, permanent tax savings are possible under a scenario with potential rate adjustments.
4) Pass-Through Entity Taxes
For tax years 2018 through 2025, the deductible amount for state and local taxes for individuals itemizing their deductions is limited to no more than $10,000 ($5,000 if married filing separately). All of this is under the Tax Cuts and Jobs Act. Because of this, many states have passed laws that can impose an entity-level income tax on S corporations and partnerships.
This was implemented to allow owners an offsetting credit, deduction, or another tax benefit. By doing so, owners will avoid limiting state and local taxes. For pass-through entities and their owners to take full advantage of this opportunity, complex analysis is required.
5) Section 199A and the 20% Pass-Through Deduction
If your business is a sole proprietorship, partnership, or S corporation, you may be eligible for a 20% deduction on “qualified business income.” But what exactly is qualified business income? It’s defined as any net domestic business income that doesn’t come from wages, guaranteed payments, or certain investment incomes.
6) Timing Considerations
The timing of when your business recognizes income and expenses can help manage tax liabilities. For some companies, it may mean accelerating income and deferring expenses.
But for others, the opposite strategy might be more beneficial: deferring income and accelerating payments. Deciding on the optimum strategy frequently requires looking at multiple-year projections using different alternatives.
7) Roth 401(k)
A Roth 401(k) can have more benefits than a Roth IRA. For example, you may be able to use it to defer taxes on income from real estate appreciation and rents.
401(k) plans are especially popular with larger companies with many employees. These participants can contribute a portion of their paycheck directly to the company’s 401(k) plan.
Small Businesses Tax Planning Strategies
- Income taxes: Many businesses will be subject to state income taxes and federal income taxes. The fees apply to C corporations in which the company is taxed. It also applies to S corporations, where the shareholders are responsible for paying taxes.
- Employment taxes: All businesses with employees are responsible for withholding income taxes and their portion of Social Security and Medicare (FICA) taxes. Also, the state and federal unemployment taxes.
- Sales taxes: If your company sells any goods or services in a state that uses sales tax, you must collect the tax from customers during the transaction. The state may charge penalties against businesses that don’t collect sales taxes.
- Excise taxes: Some businesses may be required to pay excise taxes for the usage of fuel, truck usage on highways, and other activities.
Resources:
- If you’re filing form 1040 or 1040-SR, Form 2106, and Schedule C, E, or F, this source can significantly help your research: Small Business and Self-Employed Tax Center.
- Here, you’ll find an explanation of all deduction categories for small businesses and self-employed individuals: Deducting Business Expenses.
- Here’s a PDF guide that includes a pretest and self-test for small business tax planning requirements; read it: Tax Planning and Reporting for a Small Business.
Tax Deductions & Credits The IRS Offers
Taxpayers who itemize their deductions rather than taking the standard deductions for their tax brackets should familiarize themselves with the IRS’s list of tax deductions and credits. These are some of them:
- The child tax credit: It offers up to $2,000 per child age 16 or younger who qualifies as a dependent. Meanwhile, the child and dependent care credit pay 20% to 35% of the cost for one child under 13 years. 2 children under 13 will receive a limit of $3,000 (up to $6,000).
- The earned income tax credit: This program gives low- and moderate-income individuals a refundable tax credit that ranges from $538 to $6,660 in 2020.
- The retirement savings contribution credit, or “saver’s credit,”: This opportunity is available to those over 18 not claimed as a dependent on another person’s tax return.
If a person’s adjusted gross income falls below a certain amount, they could save up to $1,000 in taxes. It depends on how much they contribute to a qualified retirement plan.
Other Tax Credits & Reliefs That Can Help Your Organization Scale
- “Small Business Health Care” Tax Credit: If you’re a small business owner with fewer than 25 full-time employees, you may be eligible for the health care tax credit.
If you want to qualify for this program, the average employee salary must generally be $50,000 or less. Also, the business must pay at least 50% of its health insurance premiums. Lastly, you must offer coverage to all full-time employees.
- Work Opportunity Tax Credit: The Work Opportunity Tax Credit is available to firms that hire individuals from the groups facing significant employment hurdles.
Qualified veterans, former prisoners, vocational rehabilitation referrals, Supplemental Nutrition Assistance Program (SNAP) recipients, and long-term family assistance beneficiaries are eligible for the credit.
- Coronavirus Tax Relief: The employee retention credit, the Families First Coronavirus Response Act, and the net operating loss (NOL) carrybacks of C corporations are a few initiatives created to help businesses affected by COVID-19.
The Importance Of Tax Planning In A Nutshel
Tax planning for businesses can help businesses minimize their tax liability. Also, tax planning can help companies to make strategic decisions about their business operations.
There are several benefits to tax planning. However, before making decisions, businesses should consult a qualified accountant or tax advisor to get the most out of their tax planning efforts.
Businesses that overlook tax planning may pay more taxes than they need to. In addition, companies that don’t plan may miss out on opportunities to save money on their taxes. In the end, if they don’t plan for their taxes, the company may find itself in hot water with the IRS if they are audited
Nesso Accounting: The Most Reliable Accounting Services In Connecticut
Accounting services are essential to businesses of all sizes. At Nesso Group, we provide business owners with the financial data they need to make informed decisions about their companies. We offer a full range of accounting services and benefits.
Our team of experienced professionals will work with you to develop a comprehensive financial plan. We’ll help you manage your finances and taxes to create a roadmap for your company’s future.
Nesso Group is the most reliable accounting firm in Connecticut. We have a proven track record of providing excellent service to our clients. Contact us today to schedule a consultation. We look forward to working with you
