The holiday season is one of the most joyful times of the year. But it can also be a major source of stress. For business owners, much of that stress is financial related. “Will I owe taxes?” “How much?” “What deduction or credits am I eligible for anyway?” These questions can be daunting, mainly because we need to figure out what steps to take to plan for taxes and don’t know where to start.

In this blog post, we’ll give you the four actionable steps to take before December 31st to ensure a smooth tax season. Let’s dive in!

Tax Planning 101

Tax Planning is one of the most important things you can do for your financial future. It’s the art of taking proactive steps to maximize tax breaks and legally minimize tax liabilities. It’s also something that should be done continuously. We recommend at least once a year towards the end of the year. Contrary to belief, April is not the time to plan for taxes. Instead, April is simply the time to push the file button.

Year-end tax planning allows you to evaluate your business performance and make any necessary adjustments before it’s too late. It also allows you to identify areas for potential savings that can significantly reduce your tax liability. Potentially saving thousands of dollars. Finally, it allows you to gain a better understanding of your business’s financial health.

Business Entity Review

The first step to plan for taxes is to assess and review the health of your business entity. This is important because business entities, such as sole proprietorships, partnerships, and corporations, have different tax implications and legal obligations. So, you’ll need to understand the business entity to get to the ultimate goal of tax savings. A business entity review involves evaluating your current business structure and determining whether it is the most advantageous.

• Review standing with the state: Your business needs to meet all the state’s rules and regulations to perform at its best. This includes filing necessary documents, staying in good standing, and ensuring your business complies with state laws. A clean slate with the state sets the stage for successful tax planning.
• Converting LLC to S Corp: This transformation isn’t just about changing your business’s legal structure; it’s about choosing the most advantageous business entity for your business and unlocking potential savings. Becoming an S Corp can unlock tax advantages and benefits that could reduce your overall tax liability. However, it’s important to carefully consider the pros and cons of each entity type and thoroughly understand the tax implications before making any changes.

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Determine Business Income

The second step to plan for taxes is to figure out your net business income. This is important because the net business income is what you will be taxed on. As a business owner, you don’t receive a W-2 to report on your tax return. Even if you do, those numbers are gross and don’t account for expenses. So you’ll be paying much more than required if you use those numbers. Determining your net business income looks like this:

• Get organized: You also need to get organized. This means creating a system for managing your financial documents, such as receipts, invoices, and bills. It ensures that you can easily access and retrieve the information you need when it’s time to prepare your taxes. Organization is the key to efficient bookkeeping, making the process smoother and less stressful. In today’s digital world, it can be as easy as creating a G-drive or SharePoint folder dedicated to these items.

• Do some bookkeeping: I know the term “bookkeeping” might sound a bit intimidating, but don’t let it scare you off. It’s less complex than it may seem. Bookkeeping essentially means capturing and recording all financial transactions in a manner that makes sense for you and your business. When all transactions are accurately captured and recorded, you can start understanding your financial performance.
• Generate Financial Statements: Another vital aspect is generating financial statements. These statements, think income statement and balance sheet, provide a summary of your financial activities. They offer a big-picture view, helping you understand how much your business is making and spending, and what assets and liabilities it holds. Financial statements are invaluable for assessing your business’s financial performance and making informed decisions.

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Set Goals for the New Year

This is a bonus, but we didn’t want you to skip it by putting it at the end. Year-end tax planning is also an opportunity to set the stage for the new year.

1. Set Goals: Both long-term and short-term goals. Take a moment to revisit your long-term business goals. Are you aiming for expansion, diversification, or retirement in the coming years? Your year-end financial decisions can play a crucial role in achieving these goals. Ensure your year-end tax strategies align with your broader business objectives. Short-term goals are just as important. Focus on boosting profits by increasing sales, reducing expenses, and optimizing cash flow through negotiations and cost-cutting. Additionally, consider refinancing debt, managing inventory efficiently, and leveraging tax credits. These strategies enhance your financial health now, aligning with year-end tax plans for immediate and long-term success.
2. Create a Financial Budget: A budget isn’t about restriction; it’s about empowerment. You decide how much you want to save, invest, and spend on the things that matter most. It’s a tool that brings your financial dreams into reality. Creating a budget involves outlining income sources and expenses using past financial information. You can then track and control spending, allocate resources wisely, and make informed financial decisions. Empowering you to achieve both short-term and long-term financial objectives.

Take Advantage of Tax Strategies

Okay, we made it. This is what you were waiting for – the ultimate goal! The last and final step to plan for taxes.

Maximizing tax strategies, including tactics like contributing to IRAs, requires a multifaceted approach. A pivotal element of this approach is seeking professional guidance. Engaging with financial advisors or tax experts brings a wealth of benefits and can significantly enhance your tax-saving endeavors. Tax professionals assist in identifying multiple opportunities for tax savings, such as tax credits, deductions, or strategies involving tax-deferred accounts. They thoroughly review your financial data, offer personalized recommendations, and ensure compliance with tax regulations, mitigating the risk of errors and potential penalties.

How Tax Pros Plan for Taxes

Here are some common tax strategies and the various ways tax professionals can help you execute them.

1. Retirement Account Contributions (e.g., IRAs, 401(k)s): Provide guidance on the optimal contribution amount to maximize tax savings and retirement benefits.
2. Expense Deductions: Help identify deductible business expenses, ensuring you claim all eligible deductions and maintain thorough documentation to support your claims.
3. Tax Credits (e.g., Research & Development Tax Credit): Help identify qualifying activities, calculate the credit accurately, and file the necessary documentation to claim these credits
4. Business Structure Optimization: Assess your business structure (e.g., sole proprietorship, partnership, corporation) and recommend adjustments based on tax efficiency and long-term goals.
5. Tax-Deferred Investments (e.g., Depreciation, Capital Expenditures): Assist in identifying opportunities for tax-deferred investments, such as depreciation of assets and capital expenditures.
6. Charitable Giving: Provide guidance on strategic charitable giving and determine the most tax-efficient methods for donating, such as appreciated assets or setting up charitable foundations.

Ending the year out strong means entering the new year knowing your financial future is secure. By taking these 4 actionable steps to plan for taxes, you’ll be on your way to a more secure financial future. Remember, you can team up with the experienced financial advisors at FMS Advisory. We’re here to guide you in unlocking the full potential of tax strategies and making informed financial decisions.

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