9 Year-End Tax Planning Tips to Set Your Business Up for Success in the New Year

Year-end tax planning tips

Reviewing the challenges faced by your business during the course of the year is a great way to learn from difficulties and set your business up for better agility when faced with similar challenges in the future.

Thinking ahead can protect you from waiting until there may be too little time to do things in a cost-effective manner, and help your business develop damage-control protocols and strategies. These year-end tax planning tips can help you get the ball rolling on putting effective strategies in place for the year ahead for your business.

1. Reconcile all accounts

It is imperative that business owners or the head of finances run a balance sheet report via your accounting software to reconcile all transactions from your business’s bank, credit card, and client accounts. This is mandatory as part of an effective year-end clean-up and tax preparation strategy. Recon cross-checks should also make sure that Escrow accounts match lease contracts and closing statements.

2. Carefully consider loan payment reconciliations

It is very common for businesses to get loan repayment records wrong. It is important that your accounting team verify amortization schedules with the financial statements as you prepare for a new year. This is to make sure the debt balances as reported on your balance sheet match the debt balance as reported on your year-end mortgage statements and amortization tables.

When it comes to loan recon preparation, you also need to confirm that the interest deductions on your income statement match the interest payments on the year-end mortgage statements, as well as the amortization schedule.

Misreporting commonly creeps in the following instances:

  1. When accountants or owners try to deduct the entire mortgage payment.
  2. When the entire loan payment is treated as a distribution, it would be fully non-deductible; but it is not always handled this way by accounting teams.
  3. When there was some mid-year change to the accuracy of the amortization schedule. Inaccuracies can occur if you missed a payment or terms were re-negotiated on interest rates, or there could also be some debt forgiveness, etc.

3. Analyze your spending

Understanding where you spend most of your money seems like a no-brainer when it comes to studying your books, but when a business doesn’t have the right accounting software set up this can be hard to identify. Sitting down with your accountant at the end of the year is an integral part of setting your business up to develop cost-saving strategies in high-spending areas in your business.

4. Analyze sales and marketing ROI

Looking at your return on marketing investment and where your business gets most of its money from is as important as studying your spending because reducing costs cannot grow a business alone. You need to be aware of what works in terms of marketing-sales ROI so that you can optimize these efforts to make more money in the new year.

5. Investigate and understand qualified tax deductions

When planning your year ahead, your business needs to understand the qualified tax deductions for your entity structure and business type.

The IRS defines qualified deductible expenses as Ordinary and Necessary expenses that are incurred in the carrying on of your business. CPAs commonly think of Ordinary expenses as those that are helping to further the growth and sustainability of your venture. Different industries and entity types are eligible for different types of tax deductions and credits. Sit with your accountant at the end of the year to establish where you may have missed an opportunity for tax relief. You may be eligible for deductions and tax credits that student loans tax credits, credits for charitable contributions, and many more.

Understanding the bounds within which your business may deduct expenses is an important step in your year planning as it can help save you time and money in the new tax year.

6. Understand multi-state and residency taxes

If your business operates in more than one state or you travel for business frequently, you may be subject to multi-state or residency taxes. Understanding state apportionment tax requirements and residency tax rules is an imperative part of your annual tax planning to ensure compliance and save your business from double taxation or tax penalties.

7. Consider your investment strategy

When your business is profitable, your tax liability to the Federal and State governments should be paid in a timely manner. Your business should avoid paying massive amounts in penalties for late or incorrect tax filing. This brings us to an important year-planning strategy around investment: don’t reinvest every dime you make as this can lead to cash flow problems when there is an economic downturn as you’ll have tax liabilities from the previous year to budget for.

8. Proactively prepare tax returns

When preparing your tax return, your CPA can either submit a full tax return with all of the information that you have for the coming year. This involves calculating your tax liability based on looking at the financial information of the same period in the previous year and editing any changes to prior year investments, sources of income, and expenses then adding new acquisitions or disposals of assets and sources of income for the current year. This works well when there have been definite changes to the business’s financial structure and when those changes are known.

Another tax preparation method involves doing a tax projection which is best used if there have been very little to no changes in the amounts and sources of your business’s net income and properties from the prior year. This can be done by the business owner looking at the previous year’s tax return and dividing the taxable income by the total tax calculation, giving you the average tax rate across the marginal tax brackets.

As part of your tax preparation strategy, save these important tax dates on your calendar:

Estimated quarterly tax payments are due on April 15, June 15, September 15, and January 17. 

9. Set up a separate checking account for your tax budget

Once your business has established its estimated tax liability, it is recommended that you move those funds into a separate account that is somewhat out of sight and out of mind. That way, your business will have the necessary cash flow available when it comes to submitting tax payments. This will also help safeguard the money due to the IRS from being used in unforeseen circumstances.

At Fusion our CPAs are qualified to help small and large enterprises prepare annual tax returns and analyze recon statements to optimize tax returns. We can help you set up your accounting software and chart of accounts to help you better understand your business finances as you prepare for the tax year ahead. Contact us today.

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This blog article is not intended to be the rendering of legal, accounting, tax advice or other professional services. Articles are based on current or proposed tax rules at the time they are written and older posts are not updated for tax rule changes. We expressly disclaim all liability in regard to actions taken or not taken based on the contents of this blog as well as the use or interpretation of this information. Information provided on this website is not all-inclusive and such information should not be relied upon as being all-inclusive.