How to Create a Tax Plan

As a busy small business owner, you probably have your hands in all aspects of the company. One activity that you may have put off until the business was up and running is to create a tax plan. Taxes and accounting can be intimidating, but if we break down the process into simple steps, you can create a robust tax plan. In this article, we will discuss business tax plan goals and the steps to create a tax plan.  

What Is Tax Planning?

You can probably guess that tax planning involves figuring out the best way to minimize your company’s tax bill. Along with that goal, tax planning involves an analysis of your small business’s overall financial health. 

For example, one of the first steps in calculating your company’s tax bill is calculating its revenue and expenses for the year. Comparing the same figure to the previous year can give you a good indicator of company health. Was there revenue growth? Have expenses grown faster than revenue?  

These are just a few of the questions you can answer when you create a tax plan.

What Is Your Business Structure?

The first step to create a tax plan is choosing the appropriate business structure. You can operate as a partnership, sole proprietorship, limited liability company (LLC), S corporation, or C corporation. Many business owners choose an LLC or similar entity because there is no “double taxation” as there is in a C corporation.

Instead, income “passes through” the business entity to its owners. The owner then pays taxes on profits received from the LLC or similar entity. LLCs also offer flexibility by allowing owners to customize the operating agreement, creating more business flexibility. 

Recordkeeping

A robust record-keeping system is essential to an effective and efficient tax strategy. This includes designated areas to store receipts, payroll records, previous tax returns, and additional areas you may need depending on your small business. This can be done electronically or physically depending on your preference.

For example, many small business owners take the home office deduction when calculating their tax liability. The deduction requires the taxpayer to have specific amounts deducted depending on the size of their office.  Documenting these measurements and keeping any receipts is necessary to claim the correct deduction amount.

Recordkeeping Schedule

In addition to having designated storage areas for specific records, dividing the recordkeeping throughout the week to ensure they are current is another good practice that helps during tax season. The following is a simple weekly schedule that does not require much time to complete:

●      Monday – Payroll record updates

●      Tuesday – Revenue transaction updates

●      Wednesday – Expense transaction updates

●      Thursday – Retirement/Miscellaneous transaction updates

●      Friday - Open

Use Separate Business Bank and Credit Card Accounts

A common accounting issue with new small businesses is mixing personal and business expenses. This refers to making business purchases with a personal bank account or credit card. Using a separate bank account or credit card for business purposes is a way to automatically categorize all the transactions on the business card as business expenses that may be deductible.

For example, suppose you plan to deduct gas expenses, as your business requires you to drive. If you accidentally use a personal card while filling your gas tank, you may overlook the transaction while reconciling your accounts as it was made with a personal card. 

Using separate accounts also fits within the weekly framework we just discussed. By dedicating a certain amount of time each week to recording and verifying business transactions, you are more likely to catch possible errors and save time during tax season. 

Manage Payroll

Managing payroll may not come to mind when thinking of tax planning but making the correct employee tax withholdings and paying the correct amount of payroll tax is an important part of paying taxes. 

Many companies outsource their payroll. This can save time and money depending on the size of your business, but it is important to use a reputable company. For example, if your payroll processor calculates the incorrect payroll taxes for your small business, you may face IRS penalties for sending in an incorrect amount. 

Consult With An Accountant 

You will undoubtedly have questions even after going through the topics we just discussed. It is a good idea to write down any questions you have while going through the process so you can have a list ready when you meet with your accountant. 

Accountants can help with “fine tuning” your tax plan by advising on more complex issues, such as:

●      When to make retirement contributions

●      New credits and deductions, such as the Qualified Business Deduction

●      Setting up sales tax processing if necessary

●      Help with estimated tax payments

Summary

Tax planning is manageable if broken into smaller steps. Here is a summary of the major steps we recommend:

●      Set up proper business structure

●      Have a recordkeeping plan, including a weekly schedule

●      Open a separate business bank account

●      Decide on how you will process payroll

●      Meet with an accountant about more complex issues

We hope this article helps your business create a tax plan. For more information on taxes and accounting, be sure to visit the rest of the Silva Tax & Accounting website!