Tax season is quickly approaching; it’s time to pay attention to your taxes. Tax planning and preparation help businesses stay ahead during tax season. However, not paying attention to it can lead your business to IRS audits and penalties.
Following are the top tax planning strategies for businesses suggested by industry experts:
1. Review Debtors — Gather Any Available Funds and Write Off Bad Debts
You can get paid more promptly and avoid bad debts by managing and assessing your debtors. You can keep a steady cash flow by setting up a schedule for debt collection. You can write off bad debt if a debtor owes you money, but it appears doubtful that they will pay. This eliminates the debtor’s outstanding balance and enables you to update your charges accurately.
- Amar Vig, Managing Director at London-fs
2. Insurance companies with captives
You can start your own insurance company to provide risk coverage if your company faces significant risk and you’re having problems acquiring the right insurance on the market. In addition, you can create tax-deductible insurance plans that are specifically tailored to your needs by establishing an 831(b) captive insurance firm.
Many of our clients have founded captive insurance firms to lower risk in their organizations. For example, one expert in online marketing created a captive insurance policy to shield him from legal danger and pay clients back if they chose to request a refund. Another business owner created an insurance policy to safeguard his reputation and brand and added a second, personalized coverage that would shield him from potential legal or regulatory action.
- Jay Soni MD of Yorkshire Fabric Shop
3. Use Accountable Plans
Do you offer reimbursement to your staff for expenses incurred for entertainment, travel, and other reasons? You might wish to employ an accountable plan if you do. If you use an accountable plan, you can write off the costs without disclosing the reimbursements as employee wages.
In other words, it can lower your overall taxable income and your employment taxes. In addition, using an accountable plan has the added benefit of helping your employees save money on taxes. This is because employees are no longer permitted to deduct various unreimbursed employee expenses under the new tax law.
- Daniel Foley, Founder
4. Establish a corporation
Business clients like to avoid taxes as much as possible. Tax planning helps how to minimize the tax liability of businesses, including corporations and partnerships. For example, when a business pays its suppliers in advance, this reduces the amount of taxable income the business has at the end of the fiscal year.
Business clients will also benefit from tax planning. You can establish a corporation that owns and controls the business for your clients. This can help them avoid paying taxes on the company’s income. For example, a top-level manager may be hired as an independent contractor for your corporation instead of as an employee. This can benefit your clients long-term because it will save them from paying Social Security and Medicare taxes on the manager’s wages.
- Maria A. McDowell , the Founder at Easy Search People
5. Review their withholding taxes
One tax planning strategy that I can share is that every person should be able to review their withholding taxes. Make sure that the amount of taxes being withheld from their paychecks is accurate.
Withholding too little could result in a tax bill come April, while withholding too much means giving the government an interest-free loan.
- Juan Dominguez, CEO of The Dominguez Firm
6. Use Depreciation
Depreciation is common in business assets and an acceptable accounting method that can be leveraged as a tax planning strategy. It allows businesses to recover, reduces taxable income, and minimizes the overall tax burden.
The Tax Cuts and Jobs Act enables businesses to depreciate as much as 100% of some properties in the year of acquisition, although this offer is in effect until the end of 2022. From 2023to 2026, the 100% bonus depreciation percentage will decrease by 20% yearly. So, you can use depreciation now to get maximum tax benefits.
- Bill Ryze. certified Chartered FinancialConsultant (ChFC)
7. Examine Any Potential Benefits of Paying Dividends
Dividends represent your portion of a company’s profits. Reviewing your company’s dividends, if any are paid out, could be quite beneficial. The most crucial factor to consider is whether you are making money off of them. If not, you might want to put that money to use elsewhere.
- Steve Pogson, Founder & E-commerce Strategy
8. Review your accounting process
Business owners with less than $25 million in gross revenue can use either the accrual method or the cash method for accounting. With cash accounting, income is recognized when it is received and expenses are recognized when they are paid. With accrual accounting, income is recognized when it is earned and expenses are recognized when they are incurred.
Typically – but not always, so consult with your tax professional – the cash option provides the business with higher tax benefits. If you’re switching, you’ll have to deal with elections and forms, so be prepared.
- Adam Garcia, Owner of The Stock Dork
9. According to projected profits, accelerate income or postpone earnings
Businesses can “accelerate income,” which refers to claiming revenues early to record them in the current tax year when it comes to certain year-end revenues by using a few inventive accounts. This is done to claim what you think will be a lower tax rate, thus saving your company money.
Contrarily, you can decide to postpone some income until the following year, which moves that income into the calendar year 2022 and provides your company with much-needed tax relief for the current tax year while also potentially reducing your overall tax bill if next year’s taxable revenue is lower.
- Umair Syed, Head of Tax & Legislation at Cicinia
10. Installment Sale
Typically, you receive a lump sum payment from the buyer when you sell a business. If there is a profit, you are liable to pay tax on it, and if there is a loss, you must declare it. You can decide to receive a series of payments over time with an installment sale, as described by tax code 453(a), which results in a deferred tax liability.
An installment sale is a wise choice if you’re going to sell your business but don’t require the full amount up front. This will allow you to get tax-advantaged revenue while allowing for a flexible transfer of ownership of your company. One of our customers set up a payment schedule for the selling of his business. He chose to spread out the payments over five years, which will enable him to avoid paying around $200,000 in taxes on the deal.
- David Floyd Owner at The Pest Informer
Conclusion
The above tips may help in accurate tax preparation and boost your business’s bottom line. However, it is a nightmare for most business owners as they don’t know much about tax rules and regulations. So, hiring outsourcing tax return preparation services can help to streamline the operations and save more on taxes.
