In general, the first step to solving a problem is clearly defining and understanding the problem itself. Paying too much in taxes as a small business owner is definitely a problem. Step two in solving a problem would likely be digging deeper to find the cause. In this article, we will uncover the cause and the solution for a high tax bill as a small business owner.
Why are my taxes so high?
There are potentially multiple answers to this question, but the number one reason you owe a significant amount of tax is you made money. Congratulations! A business that generates substantial profits and revenue is likely to have a higher tax liability. Taxes are typically based on a percentage of income, so the more the business earns, the higher the tax bill.
Now, that is not to say you don’t have any leverage for decreasing the amount of tax you owe. Some other factors that contribute to a higher tax bill than you would like include:
- Lack of deductions and credits
- Inefficient expense management
- Depreciation and amortization
- Limited use of retirement accounts
- Insufficient tax planning
- Choice of business structure
How do I reduce my taxes as a small business owner?
Most people want the silver bullet, the elusive tax deduction to wipe out their tax liability; however, that does not really exist. Instead, small business owners should be seeking out tax professionals and CPA advisors that can prepare a tax projection, also known as a tax forecast or estimate. A tax projection is a financial analysis that helps small business owners predict and plan for their tax liability in the future. It involves estimating the amount of taxes a business is expected to owe based on its current financial situation and anticipated changes. A tax projection provides data that allows the CPA to subsequently make recommendations and present opportunities for tax savings.
What information is needed to prepare a tax projection?
- Financial statements, including the income statement (profit and loss statement) and balance sheet.
- Details about the business's revenue and sales broken down by product or service.
- A breakdown of all business expenses, including operating expenses, cost of goods sold (COGS), and any other relevant costs.
- Copies of the business's recent tax returns, which provide insights into historical tax liabilities and deductions. They also help identify any carryover items that may impact future taxes.
- Depreciation schedules, which includes details on the cost, useful life, and depreciation method used for each asset.
- Payroll information with details about employees’ salaries, benefits, and payroll taxes.
- Significant capital expenditures or investments made during the projection period including purchases of equipment, property, or other long-term assets.
- Loans, outstanding debts, or interest payments made by the business.
- Quarterly estimated tax payments, which helps in projecting accurate tax obligations for each quarter and the amount contributed to the current year's tax liability.
How much will a tax projection cost?
“It depends!” The answer we love to hate. If time is money, you can assume that preparing a tax projection could be costly since it doesn’t happen with a click of a button. The cost of a tax projection will likely depend on a few factors:
- Business complexity - The complexity of the business, including the number of revenue streams, expenses, employees, and any intricate financial transactions, can influence the time required. More complex businesses with diverse operations may need a more detailed analysis, thus taking longer to complete.
- Bookkeeping and organization - If the business owner has well-organized and up-to-date financial records, it can significantly streamline the tax projection process. Efficient recordkeeping reduces the time spent gathering and verifying information.
- Tax law changes - If there have been recent changes in tax laws that affect the business, the tax professional or CPA may need additional time to research and understand the implications of these changes on the tax projection.
- Communication - Effective communication between the business owner and the tax professional is essential. Prompt responses to queries and collaboration in providing necessary information can expedite the process.
When should you request a tax projection?
Definitely before yearend, and no, yearend is not December 26 through December 31. CPAs and tax professionals are real people with real lives! Just like you, they want to spend time with their families and loved ones. It is recommended to reach out for a tax projection mid-October to mid-November. This allows time to decide on the appropriate tax-saving opportunities and take any required action before yearend. For example, opening and contributing to investment accounts, paying out employee bonuses, or purchasing equipment and putting it into use all require time and should be done before December 31.
Another equally important time to request a tax projection is during the summer months of July and August. Your CPA will consider the year-to-date income and the other factors mentioned previously. Again, this timing allows you additional time to make wise financial decisions and plan how to decrease your tax liability for the remainder of the year.
The effectiveness of reducing your tax liability through the use of a tax projection depends on the quality of information provided, the accuracy of the projection, and the presentation and action on the tax-saving opportunities that precede it.
Who's your Tax Pro?
Given the complexity of tax laws and the unique nature of each business, seeking advice from tax professionals is crucial. CPAs and tax advisors can provide personalized guidance, helping businesses navigate the intricacies of the tax landscape and identify the most effective strategies for their specific situations.
To make the most of all available deductions for small business owners, Dillon Business Advisors implements a Team of 3 accounting, tax, and advisory professionals in small businesses to reduce the tax burden and keep more money in your account.
At Dillon Business Advisors, we work with owners just like you. Let’s schedule a call to start planning for your future.
