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Be Prepared for Tax Time

Worried about April 15th yet? There’s no time like the present for tax planning. As John Wooden famously said, “Failing to prepare is preparing to fail.” Read on to learn how you can reduce your stress and hopefully save money in the process!

Review Current Financial Position

Fall is the perfect time for tax planning. The majority of the year is behind you, allowing for a more accurate estimate of your current financial position. Review your most recent financials, and compare your current year performance to prior year records to forecast your revenue for the remainder of the year. Include any big changes you know will happen in the 4th quarter as well.

Understand New Tax Law Implications

As of the writing of this article, the tax law changes proposed by President Biden haven’t been enacted. Whether they pass or not, you still have the recent changes of the Tax Cuts and Jobs Act (2017), SECURE Act (2019), CARES Act (2020), Consolidated Appropriations Act (2020), and the American Rescue Plan Act (2021) to wrap your head around. In addition, Minnesota recently passed their omnibus tax bill H.F. 9 conforming with many of the Federal law changes, with retroactive changes and new forms.

Research how these changes affect you, and forecast whether you need to increase or decrease your withholding and Q4 estimated tax payments before the year ends.

Defer or Accelerate Income

You may have the ability to defer or accelerate income at the end of the year. The methods and timing vary for each business, but the question is: are you better off paying taxes on that money this year or next year? Differing circumstances and changing laws can allow taxpayers to slide into lower tax brackets and pay less tax.

If you decide to implement this strategy, make sure it is consistent with your business’s accounting method.

Determine Tax Deductions

On the business side, have you exhausted all ordinary and necessary expenses for your industry? Are there any uncollectible debts to write off, or obsolete inventory or fixed assets to dispose of? On the personal side, are you able to itemize this year or next year, and does it make sense to accelerate or defer deductions?

A thorough understanding of your business, your industry, and the current tax law are needed to maximize your allowable deductions.

Make Appropriate Purchases

For companies with the right cash flow and business needs, big fixed asset purchases at the end of the year can have dramatic tax effects. Utilizing special depreciation rules, a business could write off 100% of a qualified fixed asset’s depreciation in the first year!

However, beware of the financing impact on your business. You could run into cash flow problems without depreciation expense in later years. Interest is deductible, but principal is not.

Fund Retirement and HSA

Retirement and health savings accounts are great tax-saving investments.

Many retirement contributions are tax-deductible, allowing you to save money now putting money in your future pocket. These contributions will also grow tax-free until you withdraw them later in life.

Health Savings Accounts are often called the triple tax deduction, because 1) you get a deduction for contributing, 2) earnings grow tax-free, and 3) withdrawals for qualified medical expenses are also tax-free!

Consult a Professional

Tax law is complicated and always changing. If you feel overwhelmed or uncertain, consult a professional. They can help you take advantage of the laws that exist in your favor, and avoid mistakes that could cost you in the long run, both financially and personally.

“Failing to prepare is preparing to fail.”

Working with Haworth & Company, Ltd.

Most accounting firms ask for your information after the year is over and you’re out of options. At Haworth & Company, we like to work with our clients year-round through our proven small business accounting and consulting programs, focusing on the data and decisions that will help you save money come tax time. Getting to know small business owners is the joy of the job, and we love seeing them save money trusting our guidance. If you’re a local small business in the Twin Cities metro and Rochester area looking for a better tax season experience please give us a call. There’s still time for you to make meaningful changes!

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