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Demystifying Tax Planning for Small Business Owners

by | Dec 1, 2023 | Business Tips, Compliance

Tax planning may sound complex, but for small business owners, it’s a crucial aspect that can save you money and headaches. Let’s break it down into simple terms and explore the questions you should be asking with the help of your CPA.

What Your CPA Will Look At:

  1. Quarterly Estimates: Did you make your quarterly tax estimates? It’s like pacing yourself in a marathon to avoid a sprint at the finish line.
  2. Yearly Expectations: What’s the outlook for the rest of the year? Knowing what to expect helps in tailoring your tax strategy.
  3. Year-to-Date Net Profit: Understanding your net profit guides decisions on expenses, investments, and potential distributions.
  4. Distributions or Payroll: How much have you taken for yourself? This affects your personal tax liability.
  5. Equipment and Fixed Assets: Are there new equipment needs or assets bought/sold? These impact depreciation and deductions.
  6. Major Life Events: Any significant personal or business changes? From buying a house to welcoming a new child, they influence your tax situation.

FAQ:

Q: What if I paid too much money quarterly?

A: Adjustments can be made to reduce or skip the 4th quarter estimate. Refunds can be applied to the following year or cashed out.


Q: What if I haven’t paid in any money quarterly towards taxes?

A: Expect an underpayment penalty. The sooner you pay, the faster the penalty stops accruing.


Q: What if I had a loss for the year?

A: File your return even with a net loss. Losses can carry forward to offset future profits.


Q: Can I pay myself too much in payroll or distributions?

A: Paying too much in salary is somewhat neutral for tax purposes. Depending on your business structure, excess distributions can lead to capital gains or negative basis implications.


Conclusion: Making Tax Planning Work for You

Understanding tax planning doesn’t have to be daunting. By collaborating with your CPA and addressing these questions, you can navigate the tax landscape with confidence. Remember, proactive planning now can lead to significant savings and a smoother financial journey for your small business.

We’ll be following up and diving deeper into some of these strategies in future blog posts, so stay tuned!

 

This post was created in collaboration with Deanna Nixon, CPA from Almacy & Co. You can find her here: almacycpa.com

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