Most business owners tend to think about taxes only when filing season comes around and they have to meet with the tax preparer. But taking some time throughout the year to understand how various aspects of your business affect your taxes can help you save more money than you'd expect when tax time comes around.
What are some ways to plan for taxes during the year? Here are five tips for any type of small business.
When planning to buy large assets, pay attention to how you can depreciate the items before you decide on a purchase schedule. Depreciation means deducting part of the cost of an expensive asset each year it’s in service, thereby decreasing your taxable income.
Current IRS law allows you to deduct up to $500,000 of the cost of most tangible business property for the year in which it was purchased. This can drastically reduce your taxes. However, it's a good idea to meet with your accountant to determine if it would be more beneficial to deduct the depreciation over several years instead of all in one year.
Prepare for Deductions
The more deductions you can legitimately claim, the lower your taxable business income will be. But this means keeping careful track of potential deductions. If you're a very small business, doing so often entails keeping receipts and other records to give to your accountant at tax time. If you're growing, you may want to consider using accounting software that will help you track business expenses in a more automated way.
If you have employees, it's vital to discuss with them the value of tracking and reporting expenses they incur for the company. Set up a system for turning in receipts, identifying what purchases are for, and avoiding "off the books" cash transactions, then communicate this system to everyone who does business on your behalf.
Business mileage and travel expenses is often one of the most overlooked deductions many businesses lose out on. Avoid missing deductions for meals, business meetings, supply runs, and other necessary travel by keeping careful logs of your trips. Make sure your employees are doing the same, since reimbursing them or being able to claim business vehicle mileage benefits everyone.
Defer Income or Expenses
If you use the cash method of accounting, you can time some of your transactions to benefit a particular year. If you have a lot of income in 2017, for example, you may want to counteract that by prepaying some expenses in the current year. Prepaid expenses could include insurance, inventory, or assets. If income is low this year, consider putting off a few purchases until January so that you get the tax deduction from next year's income.
If you're on the accrual system of accounting, it may be a little harder to time your expenses, but you can still do so by employing strategies such as timing when you put items in service and harvesting losses before the end of the year.
Use Quarterly Payments
Paying part of your tax bill throughout the year doesn't strictly reduce your bill, but it prevents adding penalties and interest to what you owe annually. It also helps keep your cash flowing smoothly because you won't have a large amount due at the end of each year. Your accountant can help you determine what you should pay each quarter and how to send the money conveniently.
Quarterly payments also allow you to be able to extend the due date of your tax return until October without penalty (if you don't owe anything) so that you have more time to ensure that you've done all you can to reduce your taxes.
While it may not be any fun to work on taxes during the year, it can add significantly to your business' bottom line. And it's never too late to start tax planning, so why not meet with your accountant today? Contact Jendrach, Dobogai, Lindseth Inc. today.