Start Tax Planning Now! How To Navigate Tax Strategies And Avoid Mistakes
Have you ever reflected on a situation and felt thankful for the prudent actions you took? Maybe it was ending a toxic relationship or trusting yourself to take the leap and start a business.
The actions we take today can significantly benefit our future selves, whether it’s cleaning up our diet, investing in healthy friendships, or getting our tax paperwork in order.
Come early 2023, I want you to feel prepared — and relieved — that you had the foresight and knowledge to get you and your business ready for tax season. Planning early may seem somewhat insignificant in midst of all the work you’re busy with. But in reality, taxes are a huge part of your business's overall financial health and affect a lot of high-level business decisions.
What was it that Mark Twain said? “The only two certainties in life are death and taxes.” Work your way through these tax strategies early — and learn how to avoid common tax mistakes — so you can make the best decisions for your business in 2023.
What Is Tax Planning?
The ultimate goal of proper tax planning is to ensure you are meeting all of your tax liabilities while paying the smallest amount of tax legally possible. There are many key players involved when it comes to small business tax planning such as deductions, income, retirement savings, the timing of large purchases, healthcare, and more.
The two main benefits of being tax efficient are having an improved cash flow and saving your hard-earned income. Tax planning should be at the forefront of your mind whenever you make financial decisions for your small business.
Small Business Tax Strategies
As we mentioned before, tax planning affects every part of your business’ finances. Grasping how these strategies can help your business keep more of its income can empower you to grow.
Find and utilize tax credits
Tax credits reduce the tax you owe on a dollar-per-dollar basis. Not all small businesses will qualify for these credits, but if you do, they can significantly decrease your tax liability.
Small Business Health Care Tax Credit: If you meet three specific requirements, including paying at least 50% of your employee's health insurance premiums, you may be able to qualify for the health care tax credit. This credit can cover up to half of the costs of your employer-paid premiums.
Family Leave Act Tax Credit: If you allow full-time employees to have two weeks of paid medical and family leave and pay them 50% or more of their wages while they are away, you may be eligible for this tax credit.
Employer-Provided Childcare Tax Credit: If you provide childcare or help your employees pay for their childcare, you may be eligible to receive 25% of these expenses as a tax credit.
These are just a few of the tax credits your small business may be entitled to. Your accountant or financial coach can help you find others that you qualify for.
Lower your tax rate with small business tax deductions
Besides fulfilling lifelong dreams and doing what you love every day, there are other benefits to owning a business: tax deductions!
Tax deductions lower the amount of money you are taxed on come tax season. It’s important to note that deductions are not credits like we discussed above. For example, if you spend $2,000 on a new Apple iMac, this doesn’t mean you’ll receive a $2,000 refund in April. But you will be taxed on $2,000 less than you would have been if you hadn’t purchased the laptop.
To see how tax deductions work, consider this example. Say there’s a new educational course coming out that will help you improve your skills and you’d like to know how it will impact your taxes. You can use this simple formula:
Expense X Tax Rate = Money Saved From Deduction
If the course costs $3,000 and your tax bracket is 20%, you’ll save $600 on taxes by claiming this business expense. There are fantastic apps and software to help you track business deductions so you can claim as much as legally possible.
Common business tax deductions include:
Business-related insurance expenses
Employee or contractor payments
Home office - determine if the regular option or simplified option is right for you
Education and training
Permits and licenses
Software and supplies
Self-employment tax
Business travel and meals
Retirement contributions
Charitable contributions - you can check the status of your desired charity here
Not all of these deductions qualify for a 100% deduction. An item may qualify as a business expense, but only 50% of the expense can be deducted. Tracking these expenses and knowing exactly what the IRS deems appropriate deductions will help save money by reducing your tax liability.
Know the taxes you owe
Owning a business is more complicated than being a W2 employee, especially when it comes to taxes. You can read our thorough guide on small business taxes and when they are due here. Some taxes you’ll want to keep in mind are
Self-employment taxes
Payroll taxes
Capital gains taxes
Property taxes
Dividend taxes
Anticipating the different taxes you owe as a business owner will help you save enough throughout the year so that come tax time, you’re not caught off guard by a huge tax bill.
5 Mistakes to Avoid While Tax Planning
You’ll also want to keep in mind common mistakes other business owners have made when it comes to tax planning. Some of these mistakes include:
Choosing the wrong business structure
Treating independent contractors as employees
Mixing personal and business finances
Getting behind on your bookkeeping
Being unfamiliar with tax changes
1. Choosing the wrong business structure
The type of business structure you choose — LLC, Nonprofit, C-Corporation, Sole Proprietorship, etc — should be based on your growth goals, the number of employees you currently employ or hope to employ, and other factors.
There are benefits and disadvantages to each business structure, so you must choose carefully. You may find that as time goes on, you need to change the structure of your business. A CPA or EA may be able to help you with this.
2. Treating independent contractors as employees
Correctly classifying anyone who performs work for you is imperative. You could face penalties and fines with the IRS for incorrectly classifying your staff members.
The relationship between you and your staff determines whether you have employees or independent contractors. This relationship comprises of three categories: behavioral control, financial control, and the relationships between the parties.
3. Mixing personal and business finances
It’s important to keep your personal and business expenses and finances separate for your own organization and also for IRS purposes. This may require combing through expenses and accounts, but it’s better to find any discrepancies now. If you were to get audited, it’s a major red flag for the IRS to see mixed expenses.
4. Getting behind on your bookkeeping
It’s easy to get lost in your day-to-day work and let an expense slip through the cracks. Utilizing software to help you with your accounting needs is imperative as a small business owner. Being disorganized can cost you both time and money.
5. Being unfamiliar with tax changes
You’re not expected to have an accounting degree on top of whatever skills and education you currently have. But as a small business owner, you do need to be aware of changes in the tax law.
Not only can state and federal tax codes and laws change from year to year, but so can your business. As you scale, offer more services and products, or grow your team, your tax liability and strategy will change. An accountant can help you navigate changes that are relevant to your business and a financial coach can help you plan and navigate your cash flow and budget around them.
What You Can Do Today To Prepare
Taxes are due April 15, 2023, but you can start filing your taxes around mid to late January. Filing early can help you receive a refund faster or give you more time to budget if you owe money.
You can first start by gathering and reviewing the documents needed for your small business tax preparation checklist, including:
Balance Sheets and Income Statements
Receipts
Bank Statements
Payroll Records
Estimated Tax Payments for 2022
Your 2022 Tax Return
Second, make sure you can log in to the IRS website and that everything looks correct in your account.
Third, review the tax deductions and credits above and see what expenses you claim. Consider making end-of-year necessary purchases to reduce your taxable income (if it’s necessary and in the budget, of course!).
Make Strategic and Informed Tax Decisions With Financial Fitness Coaching
If you’re feeling overwhelmed by financial documents, estimated payments, or small business deductions and credits, consider hiring a financial coach to help you start to learn and understand the importance of running a tight financial ship and working with a great accountant and tax strategist. Your financial coach can help you organize your business’ cash flow, monitor your net profits, find any gaps in your financial plan, and put you on the right track for next year’s tax season.
At Financial Fitness Coaching, we may not do taxes, but we do help our clients all year round with important tax decisions and work with you and your accountant (or connect you to one of our great partnerships) to ensure that you’re redirecting those savings toward your financial goals. Having a professional financial coach in your corner can help you navigate the muddy waters and understand what to ask your accountant and help you stay on top of it. To see how we can help you and your business email me at kristen@financialfitnesscoaching.com or simply schedule a free 20-minute Discovery Call on my calendar.