Tax Planning is often misunderstood and overlooked by many business owners. Many individuals assume that they have to make a large purchase by the end of the year to save money on taxes. They also believe that tax planning starts at the end of the year.
I coach my clients to change the way that they think and to challenge their current beliefs. If the term ‘tax planning’ is irrelevant to you until November or December, you are not participating in the benefits that true tax planning can offer.
The most successful business owners' tax plan all year long. They make decisions on a monthly basis around cash flow and taxes. Taxes are the largest outflow of cash for the majority of businesses, yet many business owners are missing out because they don’t have a plan for the cash outflow. If you are reading this and it applies to you, I want to reassure you that you are not too late to start tax planning today.
The idea of tax planning is simple and revolves around the key ingredients to a business: consistency and predictability. There are 3 reasons you should start tax planning now:
1. To Predict Your Taxable Income
When you know your taxable income amount, it allows you to make better business and financial decisions in regards to your investments and cash flow. Tax Planning will allow you to predict your taxable income to
2. To Ensure Safe Harbor Estimates
The IRS requires two different forms of payment for filing taxes throughout the year. You either withhold your federal income tax payments on each paycheck or pay quarterly estimated tax payments.
Quarterly estimated tax payments are due every 90 days. The IRS will charge you penalties and interest for not paying enough money during the year. The term for this is the safe harbor calculation.
The IRS requires you to make one of the following payments: 90% of your current year’s tax amount or 110% of your prior year’s tax amount on your tax return to avoid penalties and interest.
The second payment of taxes is after the tax return is complete. Depending on your tax total, you will either owe money, or a tax return will be issued. If you receive money back, you paid too much in taxes. If you owe money, you did not pay enough money during the year, and now it is time to pay up!
3. Applying the 5 Pillars of Mastering Tax Strategy
Tax planning allows you to execute strategies that decrease tax liability and taxable income. Tax planning must start during the first quarter of the year to provide enough time to execute strategies to decrease your taxable income.
Tax planning is essentially an investment, you will not see results right away, but you will long-term. I always recommend using a professional when you are starting to truly understand the importance of tax planning on your overall tax liability. My most successful clients start tax planning in the first quarter of the year. It works.
If Tax Planning seems too intimidating to start on your own, book a Tax Planning Strategy Call with me. The amount of opportunity to utilize the tax code to your advantage is endless and worth investing in.