Business owners, especially when they fall into the definition of a small business, should learn how to pay less taxes. Paying taxes isn’t inherently bad, but when lack of capital and cash flow are the main problems owners face, saving as much money as possible makes good business sense.
One of the key ways to reduce taxes is through proper planning.
Tax planning is a vast industry with numerous strategies that can be employed to reduce your tax burden.
In this article, we’re going to cover key ways that you can:
- Reduce your tax burden
- Increase your profits
How to Pay Less Taxes With Proper Planning?
Planning is the key to success in business, but many companies forget that the industry changes and evolves all year long. You need to spend time at the end of the year to do the following.
Review Your Finances and Books
When money is coming in, people spend less time reviewing their finances and books. Prior to the next step, you’ll want to review both your finances and books.
Reviewing these two items before going to an accountant will allow you to come up with questions to ask that are vital for the year ahead. A few of the things you’ll want to review pertaining to your finances and books are:
- Debt: What is your debt level, and has it increased throughout the year?
- Cash Flow: How much liquidity do you have? Do you have the cash flow to continue growing your business and leverage opportunities?
- Sales: How were your sales this year? Did you make more sales and earn less? Did you make fewer sales and earn more?
- Profit Margins: What are your yearly profit margins? Have your margins decreased over the past year?
- Net Profit: How much money do you have left after paying all of your business expenses?
Running your financial statements and making sure that your books are in order are vital to helping your business save money and increase profits.
Washington’s Small Business Development Center states that you should analyze your finances 52 times a year. Weekly reports help ensure that invoices are paid, inventory methods are healthy, and that you’re making informed business decisions.
Meet With Your Accountant and Tax Advisor
Reviewing your own books and financial statements is an excellent start to understanding your business’ financial health. However, you’re not a financial professional who can look over the trends in your statements and pull out valuable information, such as:
- Trends with product sales slowing
- Debt accumulation on products with shrinking margins
You should be meeting with your account and/or tax advisor quarterly to discuss the following:
- Tax changes that may have an impact on your business.
- Quarterly taxes and to ensure your books are accurate.
- Tracking and leveraging tax deductions.
- Tax implications of business changes.
A tax professional can discuss what changes you’ve made and plan to make that will impact your tax burden. For example, will the business restructuring you’re planning save you money? If you hire new employees or offer new insurance options, will you save money or spend more money?
If you’re purchasing new equipment or did it during the year, claiming depreciation now rather than over time can help you save money.
Building a close relationship with tax professionals is one of the best decisions you can make for your business. Your accountant can work through your taxes to find ways to save you money and make sure that you fall within the effective tax rate of 19.8% that small business owners pay.
Depending on your industry, your advisor may find ways to use tax credits and meet certain requirements to access these credits.
You’ll want to take this time also to discuss your goals and plans for the year ahead. We’ll discuss plans in the next section, but you should have a vision of where you want your business to be next year.
Talk to your accountant to discuss your goals for the coming year and any recommendations to meet them that the professional can offer. For example, you may apply for government grants for your business type to help you reach your goals with a smaller financial burden.
Create a Business Plan for the Year Ahead
You’ve reviewed your financials and met with tax professionals, and now it’s time to use this data to help your business grow. Forecasting your business’ year ahead comes with a lot of “what if” questions.
- What if inventory costs rise. Will you raise prices?
- What if you raise prices? Will customers pay the higher price?
- What if a product release is delayed? Will you have cash coming in to stay afloat?
You’ll want to use your books to guide the year ahead. When analyzing your finances and books, dig deeper and determine if:
- Profit margins are too low and price changes need to be made.
- It’s time to negotiate better deals with suppliers.
- Certain products or services need to be phased out.
- Consolidating debt can lead to long-term savings.
At the start of every new year, you should have a plan in place that guides your business decisions. If you have to raise prices, the beginning of the year is the perfect time to do it. Creating a plan for the year ahead will help your business increase profitability.
Plus, if you’re making investments to reach your growth, these investments can be deducted from your taxes to help lower your tax burden.
Year-end planning and reviews are just a small part of lowering your taxes and increasing your profits. When you maintain strict control over your finances and plan for the year ahead, you’ll reduce your risk of an unprofitable year or overpaying in taxes.
However, you must ensure that the steps you take to reduce taxable income don’t impact your cash flow in the process.
Focusing on just ways to reduce taxes almost always involves spending money. You want to plan for the year ahead to reduce taxes, improve profits and maintain healthy cash flow at the same time.