If you are a busy business owner, it can be easy to want to put off tax season. With so many things on your plate, you may want to keep pushing taxes to the side. But, there are plenty of reasons to start thinking about year-end tax planning right now.

Why Is Year-End Tax Planning Important?

The phrase “tax season” implies that there is a certain time of the year when business owners should focus on taxes.

But in reality, tax planning should be something business owners think about all year. 

When you are aware of tax planning, you can make decisions throughout the year that benefit your business by potentially increasing your deductions and decreasing your tax liability. This is especially true at the end of the year. So don’t wait. Get started today.

7 Reasons To Start Year-End Tax Planning Right Now

Here are seven benefits of getting ahead of your year-end tax planning.

#1) Make business decisions that affect tax liability while you still can.

As the clock winds down to midnight on December 31st, so do your chances of making business decisions that can impact your tax liability. In some cases, once the new year hits, you lose opportunities to make adjustments that can affect your taxes.

When you plan ahead, you have time to make business decisions that will affect your taxes.

#2) Prepare a projection to see what you might owe.

When you start year-end tax planning early, you have time to create a tax projection. A tax projection can give you an idea of what you might owe for the year. Based on this data, you can determine if you need to make moves to impact the amount due, and if so, what decisions you should make.

Plus, it can give you an idea of how much money you need to have set aside for taxes.

Related: The Beginner’s Guide to Financial Forecasting for Your Business

#3) Decide if you should increase spending before the end of the year.

One way to decrease your tax liability is by increasing spending. Use your tax projections to determine if you should increase your spending before the end of the year. For example, if you anticipate that this year’s profits will be higher than next year, you may want to take more deductions this year.

If you determine you want to increase spending, you have time to:

  • Stock up on products and inventory you know you will need next year.
  • Pre-pay for services or fees that will be due after the first of the year.

#4) Decide if you should defer income until next year.

Just as you can alter your tax liability by increasing or decreasing spending, you can change your tax liability by increasing or decreasing income. In your year-end tax planning, determine if you should hold off on collecting income.

For example, if you want to have less tax liability for the current tax year, you may want to postpone income until the next calendar year.

#5) Identify opportunities to decrease tax liability.

When you get an early start on year-end tax planning, it gives you time to identify ways to decrease your tax liability and execute the tasks that need to be done to receive the credit or deduction. Here are a few examples:

  • Bad Debt: Take time to go through your accounts to identify outstanding invoices that are likely to not be paid. Plan to write off any bad debt.
  • Old Equipment: Go through your equipment to identify items that may be obsolete and require replacement.  Purchasing replacement equipment this year can help to reduce your tax liability by creating a deduction this year.
  • Employee Bonuses: The end of the year is a great time to show appreciation to your employees — while reducing your taxes. Bonuses to employees are always tax deductible as business expenses. Bonuses to shareholders and owners come with different rules, but can be deducted in some cases.
  • Employee 401k: Setting up and contributing to a 401k plan for your employees can benefit them and you as you can claim a tax credit for setting up retirement plans for your team.
  • Energy Efficient Property: Tax law includes possible deductions for businesses with energy-efficient property. Commercial property updates to energy-efficient HVAC, hot water, and lighting can lead to a deduction in some cases. Purchasing alternative and hybrid, energy-efficient vehicles may also lead to a tax deduction.

Related: What’s a Fractional CFO? Does Your Business Need One?

#6) Figure out what you should do based on changing tax rules and regulations.

New legislators and leaders can lead to changes in the tax code. When you plan ahead, you can look forward and see what changes might be expected. A few things to keep in mind as you look ahead to potential new tax plans.

  • Will taxes go up or go down next year? Determine which year would be better to have more liability.
  • What new tax rules were added, will be added, were revoked, or are likely to be revoked? Consider how changes to the tax code may impact your plans and opportunities.

#7) Decide if you need to change your tax status.

In some cases, small businesses may even want to change their tax status as tax season approaches. As businesses grow or evolve, there may be benefits to adjusting their tax status from a sole proprietorship, partnership, S corporation, or C corporation.

When you plan your taxes ahead of time, it gives you more time to determine the benefits of changing your status and execute the steps to changing your status.

Start Year-End Tax Planning Right Now

Tax planning isn’t a seasonal business task. It is a year-round consideration that your business should regularly assess, analyze, and use to make business decisions.

Don’t wait until it’s too late. See what you can do right now to benefit your business by getting started with year-end tax planning.

If you need help, CFO Solutions is here to guide you through the process. Learn more about our tax preparation services and schedule a free consultation to see how the team at CFO Solutions can help you start planning before it’s too late. Schedule your free consultation today. 

Susan Nieland