Let’s Talk About Year-End Tax Planning
In the fall of every year, accountants all over the country start talking to clients about year-end tax planning. Despite all the talk, many business owners and individuals turn a blind eye to the subject. Yes, it is “extra work”. Yes, it takes money and time that could be spent selling products, fixing something, or doing some other operational task. Yes, it is a choice you can make to avoid it. However, a little bit of tax planning can help you make better decisions for your business and personal life. Best of all, it can save you money by minimalizing your future tax obligations.
Tax planning is a fairly simple concept. What we are talking about is examining your personal and business performance, understanding and leveraging the tax code (particularly those items that have changed in the last year), and making decisions about payments, purchases, and investments that take full advantage of the federal tax code.
To begin the process, whether you are doing the planning yourself or sitting with your accounting professional or financial planner, it is essential to have your books and records up to date. Why? Because a review of your actual expenses and a comparison of your profit, loss, expenses, and inventory as well as personnel costs is essential to make intelligent decisions about your year-end plans. You will want to examine your spending, cash flow, and retirement contributions, and of course, look at the prior year’s numbers to determine how your business has grown or contracted.
Determine Your Current Financial Situation
With your books up to date, you can arrive at a fairly accurate projection of where you stand this year. Now you are ready to determine what your initial tax obligation will be considering the current tax rates and then look at your tax withholdings to date. Is there a shortfall? Paying down on your obligation before the end of the year—particularly if you are more than 10% deficient—will help you avoid penalties. However, before you write that check, consider all deductions that might bring you closer to compliance.
In our planning process, we will also examine all deductions that might be available to your business, especially items that you may have overlooked in the past. Timing is on your side concerning deductions. If you have had a fairly successful year, this might be the opportunity to move a little extra cash into things like your retirement savings or investing in new equipment to grow your business, or help the company become more efficient. It is not unheard of to even prepay the first quarter taxes.
In addition, you will want to take advantage of the following deductions on your personal taxes:
- Certain retirement plan savings
- Medical and healthcare premiums not paid by the company
- Uniforms that are required for work
- Interest on your student loan
- Taxes on your family home
- Interest on your home mortgage
- Losses on investments
- For teachers, any supplies purchased by you for your classroom
- Charity donations.
Business Deduction Opportunities
After the pandemic years of tax legislation that has been, arguably, kind to businesses, 2022 has been a quiet legislative year, except for the CHIPS Act designed to bolster the production of domestic microchips manufacturing, as well as the Inflation Reduction Act. Both acts will have little or no impact on small businesses, and provisions on the IRA, aimed at creating an alternative minimum tax for large corporations (particularly multinationals) don’t impact income until next year.
Tax planning for the owners of small businesses, therefore, should concentrate on the following areas:
- Last minute 179 deduction investments. If you’ve been holding off buying a new service vehicle, or a new piece of equipment for the business, buying that item now provides an opportunity to write down the entire cost of the vehicle this year.If you have had a successful year, this deduction has the potential to offset considerable tax obligations, making the new equipment purchase a true bargain that will enhance the productivity of your operations for years.
- Bonus or not to bonus? Your accountant can help you plan if removing money from the company in December is better than waiting until next year. It’s all about taxes and cash flow. Finding that balance will make the most of your balance sheet.
- Prepay Expenses. Sometimes it makes sense to prepay some deductible expenses now to build up larger deductions this year. Again, your accountant can advise which move makes the most sense for your situation.
- 401(k) plan payments, IRAs, and other retirement incentives should be maximized whenever possible, especially opportunities to roll to a Roth IRA, which will yield tax-free benefits at the time of withdrawal.
- Employee matching of 401(k) and bonuses paid to retirement plans. With greater pressure being placed on employers to help employees develop retirement savings, a successful year is a great opportunity to help employees build their savings with bonus 401(k) entries.
- Avoid penalties by reviewing tax pre-payments now. If you have increased your revenue but not increased your quarterly filings, you may find that you are deficient with the IRS. Making a payment before the year’s end will ensure that surprise underpayment penalties don’t rain on your parade come April.
There are a host of options to maximize your income, minimize your tax obligations and make the most of a successful year. Tax planning is the way to ensure you are in the best position possible to have a happy new year, from a cash-flow perspective, at least.
If this sounds like a great idea, please feel free to contact our offices for more information or to set up an appointment with one of our professionals.