When it comes to your tax bill, it is never too early to start planning. This is especially true for digital marketing that are generally high-margin businesses and for e-commerce companies that have high advertising spend on top of inventory spend. The nature of these industries and relatively newness to the old accounting guard and tax authorities make agencies and sellers prime targets for audit review or confusion by traditional tax firms. However, a little planning can go a long way. In this article we cover best practices for saving money and time on your finance and tax compliance.
The earlier you start planning the better to save money on your taxes. With tax season still months away, now is as good a time as any to take a look at your tax planning strategy. Tax preparation shouldn’t start right before your taxes are due. For best results it should be an ongoing process. Here are some tax planning tips that could save you money.
It’s Never Too Early To Start
While you don’t have to prepare the paperwork and file for months, when that time comes having things dialed in, will save you a lot of time, stress, and money. You are getting taxed on every dollar you’re earning today and often, a little foresight can determine whether it’s 30 cents on the dollar, or in some cases zero. The magnitude of change will vary based on your tax profile, but in our experience, all clients are leaving some sort of tax savings on the table. Some important aspects of tax planning include:
Deciding to Take The Standard Deduction or Itemize
For business owners, anticipating whether you will be able to take the standard deduction vs. itemized deduction can offer a lot of foresight. Last year we saw the standard deduction increase while local taxes became capped at $10,000. For single filers the standard deduction is now $12,000, joint filers $24,000, and for head of household $18,000. This means that it may not be as advantageous to itemize your taxes, because the standard deduction could be greater and for our clients in California and New York, any state income taxes paid over the $10,000 essentially lost benefit. This is critical because it highlights whether charitable contributions will help you tax bill if you are limited to the standard deduction (they will have no tax impact if so). The only way to know for sure is to talk to your tax advisor about what makes sense.
Planning For Deductions
If it makes sense to itemize your taxes, then you will want to start planning for deductions. There are a lot of important tax deductions that can significantly lower your tax liability. Many ongoing business expenses qualify as deductible expenses. This includes office rent, utilities, phone and internet expenses, travel expenses, continued education expenses, professional fees, business meals, software, and subscription fees. These expenses can really add up over the course of a year. Being proactive with your tax planning strategy can help keep track of your necessary and ordinary business expenses.
Timing Major Expenses and Income
Do you need new office equipment? Tax planning can help you strategize these purchases so that they make the most financial sense. Are you looking for more tax deductions this year? It may make sense to make a purchase before the close of the tax year so you can reap the tax deduction benefits. Or if you are nearing the cusp of the next tax bracket, it may make sense to delay income until the following year. Companies often do this by appropriate timing invoices (income) and/or bonuses (expenses). Often the question is, would you rather spend $5,000 on your business, or pay the government $2,000? It’s common for CEO’s to have very different opinions on how to answer that question, so we recommend asking it earlier.
Pay Estimated Taxes
If you expect to owe more than $1,000 in taxes, then you will be required to make estimated tax payments. These payments are due quarterly so, April 15, June 15, Sept 15, and Jan 15. Making these payments on time is important to avoid any unnecessary penalties, and they can also lessen the tax burden at the end of the year and spread out the tax impact
Tax Savings Account
Setting aside a portion of your income for a tax rainy day is a good idea to provide a little extra cushion. It is advisable to set aside 20-30% of net income. You can make estimated tax payments out of this account. The key here is to estimate your annual tax bill then agree with your finance team or accountant, to debit some percentage of revenues (much smaller percentage), to the savings account. This creates the set-and-forget automation many owners seek when looking to handle finances. We advise our clients to find high-yield savings accounts, so that the money accrues interest to you, then paying it to the government at the end of the year. The benefit is that if an advisor can provide you with tax strategy to cut your bill down, any remaining amounts left in that account are a windfall to your business. You pay your taxes, save on taxes, and have extra cash for your business – it’s a win, win. Ultimately, it helps ensure that you always have the funds available to meet your tax obligations and avoid scrambling around last minute.
Create Good Accounting Habits.
Part of tax planning and tax preparation is having a good accounting process. You need a good system to monitor all outgoing expenses and cash flows and be able to segment your P&L across products, territories, and clients. You also need to be able to stay on top of invoicing and have access to important financial reports. These reporting best practices allow advisors to see where tax planning opportunities may lay. This is where it is really important to stay organized and consistent.
How to Keep Good Records
Keeping good records is vital when it comes to tax planning and tax preparation. You will want to keep track of everything, receipts, income flows,employee records, client information, transaction information, and more. A detailed paper trail is necessary for accurate tax preparation and also for audit protection. It is suggested to maintain records for at least 3 years if not 5-7 years. Keeping physical records is a good idea, however you can also keep digital records. Digital records save space, time, and are easily accessible. You can scan them right into your computer, or even take pictures of receipts while out and about. Most accounting software programs offer mobile access which can automatically categorize expenses as they come in. This saves a lot of time, and streamlines the entire process. The first place to start with your accounting process is to select a good accounting software program. You can’t go wrong with either Quickbooks or Xero. Both are reliable, effective, and possess a lot of great features designed to make the accounting process easier. You can learn more about each program in our detailed evaluation of them here.
Working With a Strategic Tax Advisor
Working with a tax advisor is a great way to get on the right food with your accounting process and tax preparation. Good accounting leads to good tax preparation, and getting the insight from a tax advisor can help make the whole process a lot easier. Keep in mind that there are different types of tax professionals. Some focus solely on accounting, while others focus on tax preparation, then there are some that focus on tax law and compliance issues. It is important to know what your tax advisors primary focus is. If you work with a group of tax advisors it is important to make sure everyone is on the same page.
Got questions? We’ve got answers! Talk to one of the tax specialists at The Tax Hack Accounting Group today to get your tax planning strategy underway! To learn more subscribe to our newsletter.