Tax Planning for Small Businesses

Tax Planning for Small Businesses

Effective tax planning is something most business owners avoid primarily because they do not understand it. However, working with your bookkeeper, CPA, or tax professional could minimize the company’s tax liability. The process can help ensure you pay the lowest tax possible and ensure you have the capital to pay the taxes you owe.

What is Tax Planning?

There are many definitions of tax planning and even more misconceptions. According to, Tax planning involves conceiving of and implementing various strategies in order to minimize the amount of taxes paid for a given period. For a small business, minimizing the tax liability can provide more money for expenses, investment, or growth. In this way, tax planning can be a source of working capital. Two basic rules apply to tax planning.

First, a small business should never incur additional expenses only to gain a tax deduction. While purchasing necessary equipment prior to the end of the tax year can be a valuable tax planning strategy, making unnecessary purchases is not recommended.

Second, a small business should always attempt to defer taxes when possible. Deferring taxes enables the business to use that money interest-free and sometimes even earn interest on it until the next time taxes are due.

Who Does Tax Planning?

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A tax professional or CPA will work with business owners to create a financial profile. Through this process, they work with you to understand the nuances of your business and develop a strategy to avoid a surprising tax bill at year-end and still ensure you have the money to invest and grow your business. This is accomplished through:

  • Capitalizing on tax breaks and incentives through the Internal Revenue Code
  • Increasing possible tax deductions
  • Evaluating tax credits offered
  • Reviewing the company’s accounting methods (cash vs. accrual)
  • Taking into account the company’s overall income, expenses, and investments
  • Reviewing the legal structure of the business. (LLC, S-Corp, C-Corp, or DBA)

An integral part of the planning and profile process is to provide the CPA or tax professional with a clean set of books. Using a bookkeeping service or automated bookkeeping solution can facilitate the process of keeping updated and clean books. Your CPA will thank you!

Why is Tax Planning Important?

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We have found that many small business owners avoid any tax planning until they realize they have to submit their financial statements and tax-ready books to their CPA or tax professional. Therefore, tax planning is an ongoing process necessary to help prepare you financially for tax time.

Business owners are running their businesses, and so often, monthly financials and bookkeeping duties fall by the wayside. Meeting with your CPA and utilizing a bookkeeping service ensure your monthly financial statements are current and reviewed by tax professionals.

Tax planning to understand how to take full advantage of credits and deductions is acceptable and legal; tax evasion is not. Tax evasion involves deceit and concealment of income and funds and is severely punishable.

The role of bookkeeping in tax planning

Bookkeeping is a must—the dangers of not doing bookkeeping stretch far beyond the financial impact on your business. It will have a negative effect on tax planning. If you don’t do any bookkeeping, or just for the sake of argument, you do some bookkeeping; you are running your business with blinders on.

  1. Schedule time for bookkeeping. Even with an outsourced bookkeeper or automated bookkeeping solution, a business owner should schedule a time to understand the business’s financial health.
  2. Use accounting software. Several accounting software programs are designed to make financial management more manageable and more effective than an Excel spreadsheet. (yes, people still use Excel only!)
  3. Don’t be afraid to ask for help. Sadly, it doesn’t take long for things to go awry. If you are behind in managing your monthly financials or are not clear on paying sales tax or payroll tax, seek help from a bookkeeping service, preferably coupled with an automated solution. These automated systems offer reminders and alerts to help you manage.

How Does Bookkeeping and Tax Planning Work Together?

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While many business owners feel they can perform the bookkeeping and tax planning necessary for their business, it is more important that they hire professionals to perform these duties.

bookkeeper performs all the daily, weekly, and monthly financial transactions required by a business. The bookkeeper prepares a management report package containing financial reports and other helpful information

An accountant examines the overall financial picture of your business. Accountants are educated and skilled in data analysis to help you make financial decisions that can impact your business’s tax planning, health, and growth.

Depending on the complexities of your business, you should review your financial statements with your CPA monthly, quarterly, or at minimum in the last quarter of the year. This affords you the ability to discuss and understand and tax liabilities, prepare to pay the taxes, and most importantly, review your financials and plan for the new year.

The absence of a clear understanding of your business’s financial health can seriously affect decision-making regarding hiring, purchasing, and other financially related decisions.

Tax Planning does not have to be frustrating

At Expex, we help our clients prepare for year-end by delivering tax-ready financial statements every month. We also work with CPAs to create the reports needed to provide insights into their business to identify issues throughout the year quickly. The best way to have a shortlist at the end of the year is to have your bookkeeping up to date on a daily, weekly, and monthly basis.

About Expex

Expex, based in Schenectady, NY, offers convenient and innovative bookkeeping services to help your business succeed. Our application, Carly, can do everything a traditional bookkeeper does and more. This financial management program expertly delivers services such as bill payments, bank and credit card reconciliation, and financial records consolidation. Call (518) 389-2305 today to get started, or contact us to learn more about Carly.