It’s that special time of year: Q4, when small businesses owners start thinking about year-end tax planning. Get ahead of the game with our 10 tax tips.
Tip #1: Make sure your books are in order
If you’re managing a small business (meaning, you don’t have an entire dedicated finance department), it’s a challenge to stay on top of the daily to-dos involved with proper bookkeeping and accounting. Right now is an important time to reconcile all your accounts and make sure your finances are in order in preparation for tax time.
Tip #2: Know your business’ financial health
Dig into your financial reports to understand how healthy your business is and to analyze gains or losses incurred during the year. Key reports to use in this analysis include your balance sheet, income statement, cash flow statement, and statement of retained earnings.
Tip #3: Create a plan for paying taxes
Paying tax isn’t optional, but you do have some options when it comes to how and when you pay your tax bill. As soon as you have a general understanding of your business’ financial outlook going into the next year, determine the best timing for paying your taxes. Your accountant can help you decide whether you should be paying quarterly estimated taxes throughout 2022 or save cash for a lump payment in April 2023.
Tip #4: Consider deferring income to reduce taxable income
Deferring income to the following year can limit your tax liability for the current year. One way to do this is to push payment due dates after the first of 2022. If you use cash-basis accounting (meaning you record income when you receive it), simply delay your invoices until after January 1. That income will then show up on your 2022 tax return, not your 2021 return.
While you’ll still ultimately owe tax on that income, it gives you more time to pay. Talk to your tax advisor or accountant to determine whether this strategy makes sense for your business.
Tip #5: Consider accelerating income instead
This is the opposite strategy of deferring income. If you project that you’ll be in a higher tax bracket next year, consider invoicing and collecting payments this year. Again, this is something that you’ll want to discuss with your accountant or tax advisor.
Tip #6: Maximize tax deductions by making necessary purchases
If you’ve been needing to upgrade your computer or other equipment, or there are office supplies or a qualifying employee education course, the end of the year is a good time to spend money on those things. Double check what’s deductible with the IRS or your tax professional. Keep in mind that any new equipment must be put in service before the end of 2021.
Tip #7: Be sure to account for transportation costs and losses
Company cars and associated expenses count as deductions. Be sure to do the mileage calculation and compare it to a straight expense deduction, because 2021, like 2020, has looked very different for business travel than most prior years. If you have canceled flights or car rentals that were refunded, add those back in as credits. Factor in any non-refundable losses from travel expenses, as well.
Tip #8: Contribute to or start a retirement plan
Contributions you make for yourself or your employees may be tax deductible with any employer-sponsored retirement plan, including 401(k), SIMPLE IRA, SEP IRA, and profit-sharing plans. If you’re a calendar-year taxpayer, you generally have until the tax due date to contribute funds to a retirement plan for the 2021 tax year. To get the tax deduction, though, you must establish many types of plans before the end of 2021.
Tip #9: Make charitable contributions
Giving to charity is a good thing for your business in many ways, one of them being the fact that it can reduce your tax liability. This works best for those who don’t take the standard deduction (meaning, you itemize deductions), because standard-deduction filers are limited to $300 in cash contributions to approved charities.
Also, be aware that if you file as an S-corporation, you may be limited in your ability to deduct charitable contributions due to a cap on personal itemized deductions for state and local taxes in The Tax Cuts and Jobs Act.
Tip #10: Get professional small business planning help
You’re in business to do something you’re really passionate about and good at — and managing your finances may not be in your wheelhouse. A professional dedicated to small business planning can help you ensure all the financial pieces of your business are looked after, going beyond simple management of finances to implementing the right tax reduction strategies and ultimately increasing your business valuation and your personal wealth.
Small business planning can be overwhelming, and Ironwood Wealth Management is here to help you to manage every financial aspect of your business. Get started by giving us a call today.
