Tax Planning Strategies: What You Need To Know
Not only is it essential to have tax planning strategies in place, but it’s vital to have a trusted advisor to turn to for questions, accurate reporting, and detailed information on tax laws. This will be different for every person based on their business and goals, so make sure to have a good idea of what yours are.
Part of planning out your strategy should include knowing what your tax deductions, what taxes are due quarterly, and mistakes to avoid.
The most common tax deductions include vehicle expenses, insurance, and rent. If you are a new company, you may also qualify for a startup cost deduction. Depending on the accounting system your company has in place, you may also be eligible for inventory or business loan interest deductions. Arm yourself with information so you can capitalize on any deductions possible.
Knowing what strategies are to avoid is just as, if not more, knowledgeable that knowing what to execute. Below are some tax planning mistakes to steer clear from:
Failing to have enough cash
One of the most common mistakes we see businesses make is not having enough cash in the bank to cover their taxes when they are due. The company may then be assessed penalties, resulting in owing more than your business initially planned for and tapping further into your well.
Failing to report trackable income
Companies that employ or operate as independent contractors must report trackable income. If you have done more than $600 in business for a client, they are obligated to send you a 1099. And since this number also gets sent to the IRS, you are obligated to report it when filing your taxes. Don’t try to fudge numbers on how much you’ve made – the IRS takes this seriously.
There is a fine line between maximizing your deductions and going overboard. With the Tax Cuts and Jobs Act, fringe benefits like team outgoings, travel, and work-related entertainment are 100 percent non-deductible. The last thing you want is to owe the IRS more money or pay the penalty for any mistakes.
While claiming too many expenses can signal a red flag to the IRS, you don’t want to miss deductions that you are entitled to claiming. Here are some common examples of deductions that you don’t want to miss out on:
- Startup costs: You can claim up to $5,000 for expenses related to getting the business up and running.
- Lifetime Learning Credit: This allows you to deduct up to $2,000 a year based on 20% off the first
- Education: $10,000 spent on education after high school. You don’t have to be working on a degree to claim a deduction – it can be for classes related to your business.
- Business services: Anything that helps your business run, from PayPal to your Wi-Fi plan can be deducted.
- Inventory: Owners can claim deductions for unpaid goods. This does not apply to services, unfortunately.
- Loans and credit cards: If you rack up interest for business purposes, it can be deducted.
Things to Remember When Preparing Your Taxes
Tax season officially kicks off in January and if you haven’t started preparing your taxes yet, remember that it’s always a good idea to start sooner than later. You don’t want to be scrambling at the last minute to meet the filing deadline, after all. There are oftentimes questions and unknowns, so getting an early start can allow you enough lead time to ensure a timely filing.
There are a few key things you’ll want to remember when you are preparing your tax filing. Here are six things that can help you optimize your filing strategy and possibly even increase the size of your tax refund.
- Weigh Standard Deductions Against Itemizing
The Tax Cuts and Jobs Act introduced higher standard deduction limits for tax filers. At the same time, it eliminated personal exemptions and reduced or eliminated several key deductions. For some tax filers, the standard deduction may result in a lower tax bill this year but it’s still worth it to consider itemizing. Review your tax filing to determine all the possible deductions you can legitimately claim. Then, compare your estimated tax liability with what you might owe (or get back as a refund) if you opt for the standard deduction instead.
- Provide Dependents’ Social Security Numbers
Whether you have children or file as ‘head of household’ with dependents, you’re going to need their Social Security numbers to claim any applicable tax credits, such as the Earned Income Credit or the Child and Dependent Care Credit. If you’re divorced and claiming a child, make sure that your ex-spouse isn’t also claiming the same dependent or your return could be delayed. If you’re planning to claim the child care credit, remember to review the IRS guidelines to make sure those expenses and your dependents are eligible.
- Organize Your Records and Documents
Being disorganized could cause you to lose out on significant deductions if you’re scrambling to find receipts and proof of expenses while filing your taxes. One way to avoid that type of headache is by using an expense tracking app to store digital copies of all your receipts. It’s a simple strategy, but incredibly effective. And, if your return is selected for an audit by the IRS you’ll have all the documentation you need to verify your deductible expenses.
- Contribute to Your Retirement Accounts
You may be filing for taxes incurred in 2019, but that doesn’t mean you’ve hit the deadline for contributing to your retirement accounts. You have until July 15 of this year to open and fund a traditional or Roth IRA account. Remember, with a traditional IRA your contributions may be 100% tax-deductible. An additional deduction can reduce your taxable income for the year. A Roth IRA wouldn’t offer such a deduction but you get the benefit of tax-free withdrawals in retirement. Additionally, you may be able to qualify for the Retirement Saver’s Credit when you contribute to an IRA.
Keep Your Estimated Tax Liability On Reserve
The tax due date is marked in red because it’s a business expense—all expenses are red and all revenues are green. Every business needs to keep the reserve for the estimated business tax liabilities after proper tax planning. Businesses can use qualified plans such as profit sharing and defined benefit plans to reduce their additional tax liabilities.
Examine Your Chart Of Accounts
As businesses grow, there are often new categories of expenses and income. It’s important to review your chart of accounts with your CPA at the end of each year and make sure you have categorized everything correctly so that you can take advantage of any deductions that are available to you.
Plan Ahead To Avoid Tax Liens
Before tax season, have your financials in order, but more importantly, thoroughly understand your tax liabilities to avoid surprises. If you can’t foot the bill because you put capital toward growth, you’ll have more time to obtain financing. Failing to pay could result in a tax lien, which adds a significant speed bump to getting either business or personal financing (though it’s still possible).
Beyond saving receipts for expenses that could be tax-deductible (i.e., charitable contributions, business expenses) and keeping them organized throughout the year, there are other steps that lend themselves to better tax planning. In the survey, the top three ways identified by respondents to stay organized were:
- Use separate bank accounts for personal and business funds (83 percent).
- Keep your receipts in case your return is examined (81 percent).
- Use a mileage log or smartphone app to record business miles driven (75 percent).
That could have tax implications. For instance, Gentner said, some taxpayers don’t realize that renting out their vacation home could result in tax deductions. Others might think income from a side gig is not taxable.
You also can ask your tax preparer in advance of the meeting for a list of exactly what documents and information you should bring so that your tax return can be prepared without a hitch.
While taxes might not be in the forefront of your mind when you’re not facing a filing deadline, it’s important to keep your tax advisor in the loop in certain situations. When you have a major life change — i.e., divorce, job change, birth of a child, house purchase — it’s worth sharing the information.
For instance, if the event would affect your tax burden (for better or worse), your preparer might have suggestions for changes to make to your W-4, which dictates how much tax gets withheld from your paycheck.
It’s also important to let your tax advisor know if you hear from the IRS about your tax return. And the sooner the better — the longer you ignore the issue, the more it could cost you in penalties and fees if you owe additional tax.
Yet don’t act so quickly that you pay the stated amount due without making sure it’s accurate.