We just passed the mid-year mark, which means some businesses are reeling from the sticker shock of their Q2 tax payment. With two quarters under your belt, now is the perfect time to assess your financial standing and make necessary adjustments to avoid being caught off guard by a substantial tax bill when the next payment comes due on September 16th. Fortunately, there are strategies that can help small business owners better manage their quarterly tax estimates and prepare more effectively for the remainder of this year and the next.
Uncertainty demands strategic tax planning
The National Federation of Independent Business (NFIB) reports that for more than two years, small business owners have expressed historically low optimism, with views about future business conditions at their worst levels in five decades. This environment of tight money and high uncertainty makes it crucial for small business owners to find ways to navigate all expenses, including taxes, effectively. Properly managing estimates can make a significant difference in your overall tax liability at year-end.
Most small businesses are taxed around 20 percent of their revenue each year, but there can be surprises within your books, and many owners are caught off guard when they are given their total tax bill. We once had a client who came to us completely alarmed at an end-of-year tax bill that was $50,000 higher than they had anticipated. Depending on the industry, that high of a tax bill may be equivalent to your entire startup budget. Needless to say, you don’t want to find yourself in that position if you can help it. A little advanced planning goes a long way.
Strategies to reduce your tax burden
- Look for outliers. One of the first steps in managing your tax liability is identifying any anomalies in your financial records. Running a profit and loss report over a three-year period and displaying the columns by year allows you to spot outliers easily. These outliers could be unusual expenses or unexpected income, which can significantly impact your tax calculations. By identifying and understanding these anomalies, you can better forecast your tax liability and avoid surprises.
- Double-check accounts receivable. Ensuring the accuracy of your accounts receivable (A/R) is crucial. If your A/R is not correct, it could cost you thousands of dollars in taxes. Inaccurate A/R can lead to overreporting your income, thus increasing your tax liability. Regularly reconciling your A/R can help you catch and correct any discrepancies, ensuring that you only pay taxes on the actual income received.
- Pay yourself first. Maximizing contributions to your retirement accounts and health savings accounts (HSAs) is a powerful strategy to reduce your taxable income. By maxing out your 401(k) and HSA, you both reduce your current taxable income and save for your future. Charitable contributions can also provide tax deductions while supporting causes you care about. These strategies help lower your taxable income and can lead to significant tax savings.
- Hire an expert. Sometimes, entrepreneurs try to take on too many demanding tasks all at once, and as a result, things get dropped. Doing your own bookkeeping takes a lot of knowledge and time to get right. If you fall behind on your books, you can’t plan or strategize for taxes — or any other financial obligations. Hiring an expert, such as a skilled bookkeeper, accountant or financial advisor, can make a substantial difference. These professionals are well-versed in tax regulations and can identify deductions and credits you might overlook. They can guide you through the process of claiming home office deductions, qualifying expenses and other tax-saving strategies. An expert can ensure that you have timely financial information, are compliant with tax laws, and minimize your liability. When you look at it that way, it’s a bargain.
- Consider the cash basis method. Filing your taxes on a cash basis rather than an accrual basis can be beneficial for small business owners. Under the cash basis method, you only pay taxes on income that you have actually received. This means that if a customer fails to pay you in full, you are not liable for taxes on that unreceived income. This method can provide a more accurate picture of your cash flow and help you avoid paying taxes on income that may never materialize.
link