Tax planning is a crucial aspect of running a profitable business and keeping more of the money you earn, but in our experience, the vast majority of business owners delay thinking about their tax bill until April. Without a clear plan for your taxes, you’ll end up facing higher tax bills and miss out on strategies that could help grow your business.
Tax Planning vs. Tax Strategy: What’s the Difference?
While they’re closely related, tax preparation, tax planning, and tax strategy are actually not the same thing.
- Tax Preparation is the process of entering your data into your annual tax return. Tax prep is reactive, meaning it happens after the fact. There’s usually very little you can do at tax prep time to change your tax bill.
- Tax Planning is a proactive approach that looks at your income, expenses, and financial goals throughout the year to estimate your tax liability and identify savings opportunities. Tax planning answers the question of how much you’ll owe in taxes based on your current scenario – it’s basically a forecast of what your tax bill will be.
- Tax Strategy, on the other hand, involves implementing specific actions or tactics to reduce your tax liability. These strategies might include timing certain purchases, choosing the optimal entity structure, identifying relevant deductions, or making strategic investments.
In short, tax planning sets the foundation for reducing taxes, and tax strategy puts that plan into action.
Outcomes and Benefits of Tax Planning for Business Owners
By working proactively with a tax professional to create your tax plan, business owners can see both immediate and long-term benefits that support their financial health and business growth. Here’s what you can expect from creating your tax plan:
- Reduced Tax Liability and Increased Savings: One of the most direct outcomes of tax planning is a lower tax bill. By identifying eligible deductions and credits, tax planning helps you minimize taxable income legally. Each dollar saved on taxes is a dollar you can reinvest into your business or other investments for growth.
- Improved Cash Flow Management: With tax planning, you’ll have a clearer estimate of what you owe, allowing you to set aside the right amount of money throughout the year. This avoids the stress of unexpected tax bills and keeps your cash flow steady for ongoing expenses and investments.
- Financial Clarity and Better Decision-Making: Tax planning provides insight into your business’s financial position, helping you make more informed decisions about spending, hiring, and expansion. Knowing your tax obligations in advance reduces uncertainty and allows you to set realistic financial goals.
- Enhanced Compliance and Audit Preparedness: Proactive tax planning reduces the risk of errors or missed filings, which can result in penalties or unwanted audits. Staying compliant not only helps you avoid penalties but also ensures that your records are well-organized and ready in case of an IRS review.
- Opportunities for Sustainable Growth: For growing businesses, tax planning can also involve adjusting your entity structure or implementing long-term strategies like retirement contributions. These steps provide tax benefits and set your business up for scalability, allowing you to manage higher revenues in a tax-efficient way.
The Tax Planning Process
Tax planning is a proactive, step-by-step approach that gives business owners clarity on their tax obligations and opportunities for savings. Here’s what the process typically involves with the Young and Co team:
- Gather Current Year Financials: The first step is to gather all relevant financial data from the current year, including income, expenses, payroll, and any major purchases or investments. This provides a clear financial snapshot to help in estimating your tax liability accurately.
- Review with a Tax Professional: Once financials are collected, you’ll meet with a tax professional to discuss your business plans and financial projections for the year. During this review, you’ll assess which deductions, credits, and tax strategies are applicable based on your unique situation and industry.
- Tax Plan Creation: With our specialized tax planning software, we’ll develop a customized tax plan tailored to your business. The software helps identify relevant strategies, deductions, and credits while aligning with your projected income and expenses.
- Review Projected Tax Bill and Timing of Tax Payments: The final step involves reviewing your estimated tax bill and determining the timing of any required payments. Your tax professional will provide guidance on how much to set aside, ensuring you’re fully prepared and compliant.
This structured approach helps business owners stay organized and proactive, and will give you a clear roadmap for tax savings throughout the year.
When Should Tax Planning Happen?
The time to create your tax plan is NOT when you’re filing your tax return because there’s not going to be much you can do to impact your taxes after December 31. Why? For most business owners, the income and expenses you recognize on your tax return will result from the time that cash hits your bank account, so after December 31 it’s too late to record these things on your tax return for the prior year. In addition, most investments (including many retirement investments) need to be made before December 31 to count for the tax year.
At Young and Co, we like to start the tax planning process as soon as your tax return for the previous year is filed, and in many cases will review your tax return with you and start discussing tax planning for the upcoming year at the same time.
At the latest, you should start the tax planning process by November to ensure you have plenty of time to make any recommended changes or implement strategies before the end of the year.
Ready to Upgrade Your Tax Support?
Our Tax Prep Suite is designed to provide small business owners with everything they need to stay compliant and minimize their tax bill. This service includes:
- Annual income tax preparation for both business and personal returns
- Guidance on deductions, payments, and entity structure
- Annual tax planning one-on-ones to keep you on track and reduce your tax bill
We also offer à la carte options to customize your support level based on your business needs.
Want to get started? Complete our tax questionnaire and book your free tax assessment today!
Young and Co empowers service-based business owners to make an impact in their world through strategic financial services. Let us be your partner in understanding how to confidently handle growth in your business. Together, we’ll build a strategic plan that sets you up for long-term financial success. Learn more about our services and how we can support you in your business endeavors by visiting our website today!
Looking for tax support for your small business? Fill out our Tax Assessment Questionnaire to learn more.
Don’t forget to follow us on LinkedIn, Instagram and Facebook.