Be Tax Happy

What Does It Mean to Be Tax Happy? How to Make Taxes a Vehicle for Business, Personal Growth, and Happiness

By Read Dive 2 years ago
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Owning your own business is a rewarding experience, but it does come with some additional responsibilities that you don’t have as an employee. Namely, planning your year-end taxes and finances.

There’s a little more involved than personal income tax, and if you don’t take a proactive approach, you could find yourself in a stressful – and expensive – situation come April.

As tempting as it may be to put off your business tax returns until the last minute, getting organized will help you in the long run. Let’s get “tax happy!”

Don’t Procrastinate

Everyone procrastinates sometimes, especially when it comes to time-consuming or cumbersome tasks like taxes. If you rely on “I can do that tomorrow” or “the deadline isn’t until next month,” before you know it, you’ll be scrambling to make that deadline.

The last thing you want to do with year-end tax planning is put it off., As you prepare to roll into the new year, prepare for tax planning. The earlier you can incorporate proactive tax planning into your schedule, the easier everything will be when it comes time to file.

Start by getting organized. Set aside time in your schedule each week near the end of the year to get a jump on your tax planning responsibilities. If necessary, set reminders for yourself on your calendar or phone, and make sure to keep taxes a priority.

Take the Time to Assess Your Financial Health

While you’re working on your taxes, take the time to assess your business’s financial health. Consider financial statements like:

  • Income statements (also known as profit and loss statements)
  • Balance sheet
  • Cash flow statement
  • Retained earning statement

These financial statements can help you determine if your company had losses or gains throughout the year. Take a closer look at the reasons why to make adjustments for the new year and set financial goals for your business. For example, if expenses are a problem, review your budget to see where you can cut back to be in a better position next year.

Compare the statements to the previous years to see whether you’ve improved, struggled, or remained neutral. Over time, these statements can reveal a lot about your business’s financial health.

Make Business Purchases

Every business owner wants to maximize deductions. One of the surest ways to maximize your deductions is by buying the items your small business needs before the year ends.

There are plenty of things you may need that you can purchase at the end of the year, including:

  • Office equipment like computers or printers
  • Office supplies like paper, pens, and pencils
  • Machinery
  • Software
  • A company vehicle

If these items aren’t on your radar, think about the things that are close to the end of their lifespan. Are you running low on office supplies like folders or paper? Is your computer or software really outdated? These purchases may help you get more out of your deductions to reduce the year’s taxes.

Defer or Accelerate Income

If you want to reduce your tax liability, deferring your income is a great way to do it. The income you receive by December 31 is income for the current year, so you can lessen your current year tax liability by postponing income until after January 1, which makes it the next tax year.

When you defer your income, it gives you more time to pay taxes on that business income. If you expect to be in the lower tax bracket next year, deferring income also helps you pay your taxes at a lower rate.

How you choose to defer income depends on your accounting method. For cash-basis accounting, you can delay income by sending your invoices late or making the due dates for the new year. You won’t receive the income until the following year, therefore, it doesn’t count toward the current year.

Choosing to defer income can leave you with less cash, however, so consider your expenses and whether you can afford to postpone income.

Another option is to accelerate income to the current year. If your business is in a strong financial position and you expect to be in a higher tax bracket, accelerating income allows you to invoice and collect more payments in this year so that more income is taxed at your current tax rate.

Figure Out Your Tax Deductions

Before you finish your books at the end of the year, determine which tax deductions you’re eligible for. Some of the common ones include:

  • Home office
  • Employee expenses
  • Travel expenses
  • Business use of a car
  • Charitable contributions

Be sure to follow the IRS rules or consult an accountant before claiming a tax deduction.

Claim Bonus Depreciation

You’ve likely purchased equipment, furniture, or technology for your business. Tax rules often require you to depreciate certain items as they’re used, but that bonus depreciation allows you to write off those costs on your return.

Not all assets qualify for bonus depreciation, however. Be sure to consult with a professional to make sure you’re making the best decision for your taxes.

Establish a Retirement Plan

If you don’t have a retirement plan set up, the end of the year may be the best time. Establishing or contributing to your retirement account can reduce your taxable income. Business owners are eligible for 401(k), simple IRA, and SEP IRA.

Depending on the plan, you may be able to deduct any contributions when you file your tax return. It’s best to discuss your options with a professional.

Keep Good Records

The recordkeeping process is an important part of efficient tax filing. The more organized you are, the easier it is to complete your business taxes without mistakes and enjoy hassle-free filing.

Businesses rely on different accounting processes, including manually tracking information, hiring an accountant, and utilizing accounting software. If your current method isn’t quite working for you, the end of the year is a good time to consider a switch.

Manual methods are cheap, but that comes at a big cost to your time. Hiring an accountant is helpful for maintaining organized books, but that may be cost prohibitive for small businesses. A cost-effective solution like accounting software is a good middle ground that gives you support for your accounting, even if you choose to work with a professional tax preparer for tax season.

Embrace Predictive Accounting

Predictive accounting is an excellent solution for business owners to manage their taxes and maximize tax savings. You can manage everything from financial reports to bookkeeping to tax payments to relieve the burden and put the focus back on running your business.

For year-end taxes, predictive accounting software helps you manage taxes throughout the year for fewer surprises. You can pay tax estimates, report on major events, report income and expenses, and more. When the end of the year comes, you won’t be surprised by a huge tax bill.

Be Tax Happy!

Being tax happy means getting a system in place to reduce your stress when tax season rolls around. If you come up with a strategy and plan your taxes throughout the year, you can relax when the year-end tax planning season rolls around and know what you’re looking at.

Author Bio: 

Shahar Plinner is a tax and accounting expert with over 20 years of experience in the field. He is an entrepreneur and known as The Tax Guru on the west coast. Shahar moved to Seattle from Israel and founded, scaled, and sold a leading tax and accounting firm in the Seattle Metro area. Over the years, he served thousands of business owners and perfected the playbook for self-employed tax strategy. That’s why he founded Formations, to make sure the self-employed never overpay on taxes again.

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