Timing does matter in the context of business tax strategies. The optimal time to act will vary depending on your industry, business and overarching strategy goals. Some of these strategies can be placed in different timing buckets, like year-round strategies, mid-year strategies and end-of-year strategies.
There are some accounting best practices that can be adopted to position businesses to take advantage of tax-saving opportunities when they arise. The most basic strategy is also one that every business should adopt: accurate accounting.
Accurate and thorough bookkeeping and financial records, including all revenue, expenses, receipts and invoices, are the foundation on which any future tax strategies will need to be built. This is especially important in the context of expense documentation. Write-offs and tax credits are the most easily leveraged tools for tax savings, but claiming those benefits requires verifiable documentation.
Accurate accounting also allows businesses to monitor cash flow, which is key for forecasting. Anticipating shortfalls can be a critical component of mid-year tax strategies and can help businesses maintain adequate cash flow throughout the year.
Another year-round tax tactic that many businesses should consider adopting (if they haven’t already) is contributing to a retirement plan. Businesses that fund IRAs or 401(k)s for their workers can benefit from significant tax deductions.
One of the main reasons it’s so important to accurately predict changes in cash flow is quarterly estimated tax payments. Every business should be, at least informally, estimating their tax liability throughout the year. Tracking tax liability can help business owners identify potential deductions when they do arise and set aside adequate money for quarterly or end-of-year tax payments.
Many small business owners are responsible for estimated quarterly payments to the IRS. Paying too little can result in penalties and may leave business owners in a position where they end up owing a much larger lump sum at the end of the year. Overpaying estimated quarterly taxes may cause business owners to sacrifice a lot of liquidity for no good reason.
You shouldn’t let the IRS hang onto cash your business might need during a tough time simply because you failed to anticipate a shortfall in sales. Although you will get overpaid taxes back, it might be too late for the funds to be put to good use.
Businesses should also keep an eye out for deduction opportunities throughout the year. This includes deductions for qualifying business expenses like travel, meals, office supplies and equipment. Phoenix business owners may want to ask their accountant about Section 179 deductions, or immediate expense deductions that allow owners to take an immediate deduction rather than capitalizing and depreciating an asset over time.
Mid-year is also a good time to start identifying and planning tax-deductible charitable contributions. It’s vital to document all contributions and ensure they are going to qualified organizations.
As you enter the last quarter, you may want to begin accelerating any upcoming deductible expenses to make sure you can claim them prior to the end of the fiscal year. Some businesses may even want to look at their accounts receivable and talk to their tax preparer about potentially deferring income until the next tax year.
This is also a good time to review inventory and consider writing off obsolete or unsellable inventory to maximize the current year’s deductions.
Businesses that participate in research activities that qualify for R&D tax credits should also ensure they’ve made the necessary investments prior to yearend.
State and federal tax codes are notoriously complex, even for experienced CPAs and business tax preparers. Many small and medium-sized business owners aren’t aware of all the tax credits and write-offs that might be available to them, or they fail to take advantage of short-lived tax-saving opportunities that arise throughout the year.
Timing can be extremely important when it comes to taxes. If you want to ensure you’re not missing any opportunities, call (480) 561-5805 to speak with the business accounting and consulting professionals at H&H Accounting Services.
