Taxes are a thorn in just about every business owner’s side and your single biggest business expense. That said, it’s fairly easy to reduce the amount of sting taxes cause—but you have to be proactive.
We’re not talking about doing anything illegal. Evading paying taxes is a recipe for disaster. However, implementing creative tax strategies is a recipe for the growth of your business by putting more investment into your business and community and less into the hands of the government.
Last week in part one, we discussed how you can lay the groundwork for your yearly tax strategy by establishing the right relationship with a qualified bookkeeper and a tax advisor. Remember, if you don’t have that right relationship, contact us, so we can support you in getting your LIFT (legal, insurance, financial, and tax) team in place.
Here, we’ll discuss how you can use this foundation to develop and implement creative tax strategies that can save your company big money on taxes.
Create Your Tax Projections
Once you’ve got your LIFT team in place, you should meet monthly with your bookkeeper—within the first 10 days of every month—to review your profit and loss statement (P&L). During this meeting, you’ll review the categorization of your income and expenses each month, rather than scrambling to get your receipts to your CPA in February or March just before taxes are due. Before this meeting, your bookkeeper should have your books reconciled, including all bank accounts and credit card expenses.
To be most effective, your bookkeeper needs to understand all of the ways you earn revenue and know the expenses required to fulfill the delivery of your product and/or service. Using this knowledge, your bookkeeper should update a daily forecast each week, and produce your monthly P&L, so you can stay regularly apprised of your company’s financial health and make strategic decisions on that basis.
Each month, when you review your P&L, you’re looking for variances from the prior month, as well as expenses that are improperly categorized or not categorized at all. It’s crucial to properly categorize all expenses, so you can measure trends in your business and write off as many deductions as possible against your taxable income.
If you aren’t sure what deductions you can write off, we recommend the book by Sandy Botkin, Lower Your Taxes, Big Time!
In late October or early November, your bookkeeper should send a year-to-date profit and loss (P&L) statement to your tax advisor, along with projections of income and expenses for the remainder of the year. Your tax advisor will then use that data to create tax projections based on your current earnings versus expenses and how much you expect to bring in over the remainder of the year.
Using these projections, you can put strategies in place to minimize your tax liability. That said, most of these strategies need to be in place BEFORE the end of the year, so ideally you should make sure you’ve started this process by the final weeks of November at the latest.
If your tax projections indicate that you’re going to owe money, meet with your CPA and us to strategize the best year-end tax strategies to implement. And again, if you haven’t run your tax projections yet because you don’t have a qualified bookkeeper or tax advisor, we can refer you to the professionals we trust most.
Put Your Tax Strategies Into Play
Once you have your tax projections ready, you want to look at whether you’re likely to be in a higher tax bracket this year compared with future years. Determining this will allow you to save on your taxes by managing when you receive your year-end income and pay your year-end expenses.
After reviewing that data, if you’re likely to be in a higher tax bracket this year than in the future, it makes sense to push taxes off into the year(s) when your tax rate will be lower. Even if your tax bracket will be higher in future years, it still might be worthwhile to push your taxes off into the future. This way, you’ll be able to use those funds, which would otherwise be in the hands of the government.
This is the question to ask yourself: Can I make more money with those funds now than I’d pay in higher taxes by pushing those tax payments off until later?
If you can make more money now, you can decrease this year’s taxes by pushing income into the future and accelerating expenses that you’d otherwise pay next year into this year. Or, you can even use the additional cash to fund tax-deferred retirement plans like a 401(k) or IRA.
If you prefer to pay taxes this year because you’re currently in a significantly lower tax bracket than you are likely to be in future years—or you have losses that will be expiring to offset your income—you should increase this year’s income. One way you can generate more revenue now is by offering year-end discounts on products and services that may not need to be delivered until next year.
Plan Ahead To Maximize Tax Savings
Managing when your company receives income and pays expenses in this manner can save you big money on your taxes, not just for 2022, but every year. And this type of creative tax planning is just one small part of an effective tax-saving strategy.
There are countless other ways you can strategize to keep more of the money you earn working for you, rather than giving it to the government. To learn about all of the potential ways you can save on your 2022 taxes and beyond, contact us today.
This article is a service of Stafford Law Firm, Family Business Lawyer™. We offer a complete spectrum of legal services for businesses and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death. We also offer a LIFT Start-Up Session™ or a LIFT Audit for an ongoing business, which includes a review of all the legal, financial, and tax systems you need for your business. Call us today to schedule.