Tax Planning for Small Business is Crucial to Your Financial Future
If your idea of tax planning for small business is meeting with your bookkeeper in December every year, the government thanks you for your extra contribution. Tax planning for small business means keeping more of your hard-earned business profits. It should involve a lot more than a once every year meeting.
Effective tax planning for small business involves not only the current year but also planning for future years. It should also involve more than just a bookkeeper. Working with a licensed tax professional, can save you a pot full of money in future years. Your business impacts your financial future, including your retirement years, and that financial future is heavily influenced by tax-related decisions you make todayi.
Owning and operating a business is a major commitment of resources, time, and energy. In your dream of business success and a secure financial future, it is crucial to think about the possibility that as much as 50% or more of your hard-earned money will go to the government. Income and self-employment taxes can easily come to that amount, even without state and local taxes.
What Is your tax status?
As a sole proprietorship, a tax planning for small business meeting with tax professionals at the very beginning of your business could save you a ton of money over the years by restructuring your business status for taxes. Your business tax entity structure not only impacts your business taxes, but also your personal taxation as well.
An examination of your personal finances and tax situation could lead to advice to change the business structure to allow for the sheltering of some income from your individual tax bracket rates. An added side benefit of the LLC, Limited Liability Company, or corporate structure is limiting your personal liability and protecting your personal assets from business risks.
Set Up or Contribute to a Retirement Account
Retirement accounts work two ways for the small business owner. Not only can you deduct contributions to the account in the year they are made, but you can also grow your money tax free for your retirement. A meeting with your tax consultant can help you to identify which retirement plans are best for the small business owner.
Income Acceleration or Deferral
Tax planning for small business also involves making decisions about income timing. Particularly for the business using the accrual method of accounting, accelerating, or deferring income can help with taxes. In using the accrual method, income is recognized when it is invoiced or generated, whether paid yet or not.
An example of advantageous deferral of income would be waiting at the end of the tax year to bill a client in the next year. This would reduce your current tax liability. If you anticipate an increase in tax rates next tax year, you could accelerate the billing of a client into this tax year to enjoy the lower tax rate.
There are many other examples of the advantages of consultation with an accountant or tax advisor. Tax planning for small business is a tool for a better financial future.