Reducing Your Tax Bill: 3 Factors You Should Consider
Updated: Jun 13
Was your tax bill bigger than you anticipated this year? I have been there! I want to help you build your financial home, and it starts with identifying tax savings. Identifying tax savings is the best way to keep more money in your pocket, which grants you the opportunity to create wealth in other areas of your life.
There are three factors to consider every year to lower your tax liability: Tax Planning, Entity Formation, and Tax Method of Accounting. Placing attention on these 3 factors will set you up for success in lowering your tax liability and putting more cash in your pocket!
1. Tax Planning
Taxes are the largest outflow of cash or most businesses, yet many business owners do not even remotely have a plan for the cash outflow. The idea of tax planning is simple and revolves around two key ingredients to a business: consistency and predictability.
There are three fundamental reasons why business owners need to plan:
1) To predict taxable income and tax liability for the individual or business
2) To ensure safe harbor estimates
3) To apply and execute the 5 Pillars of Mastering Tax Strategy
2. Entity Formation
An entity is an organization created by one or more individuals to carry out the functions of a business that maintain a separate legal existence for tax purposes. It can be created at the local or state level. Entities refer to the structure of the business more than what the business does.
The six most popular entity types among business owners are:
Limited liability companies
Each one of these entities are unique in that they all provide you support to ensure that you are taking advantage of every tax deduction to reduce your taxable income. Choosing the right entity structure for your business and maintaining the separation of business and personal transactions will set you up for success in identifying more tax deductions.
3. Tax Method of Accounting
Diﬀerent industries have diﬀerent ways of reporting income and, according to the taxpayer’s occupation, provide certain skills, experience, and education. This variance in industry and experience will allow you to decide on which method of accounting to report income and expenses. There are a few diﬀerent methods of accounting and depending on the industry, determines the diﬀerent type that may be used.
Understanding and applying the correct tax method of accounting will change your outlook on your tax return and how you prepare it. The most common tax methods are the accrual and cash methods.
To save money on your taxes, you need to stay consistent with one method and stick to it. The revenue recognition policy of a business is determined by these tax methods of accounting and could be the difference between paying thousands in taxes one year or not.
Wealthy individuals know how to create, keep, protect, and invest their money. They also know how to use the tax code to their advantage. The most wealthiest individuals are following a system and consider these factors every year when filing their tax returns.
Remember, everyone's financial situation is different. It is always important to talk to your accountant or trusted advisor before implementing any strategy on your own. If you are unsure where to start or need help with these three factors, book a consultation call with me!