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By Nick R. Strain
With the summer season quickly coming to a close, vacations and barbecues could be crowding out your business tax planning. But, this is the perfect time to review your business’s tax and financial plans with your Certified Public Accountant (CPA). Why at the end of summer? Here are some potential benefits:
In my experience, small business owners typically wait until the end of the year to think about their tax returns. Why scramble later when you can check in now and ensure you get the most out of your returns?
Have you ever been told that you could have saved on your taxes, but it was too late? Too often, small business owners fall victim to that. Checking in with your CPA can help you avoid tax mishaps and ensures that you make better business decisions for the upcoming year.
Meeting with your CPA at the end of summer will help you form assumptions for the remaining part of the year and develop a detailed tax plan. Every good tax plan involves actionable items that the client should consider in order to minimize their tax liability. Starting this process early gives everyone more time to make decisions and monitor the cash flow required.
CPAs commonly work more than 60-70 hours a week during tax season. During their down season, however, they often have more bandwidth to offer expertise on the past tax season’s trends and where they see them heading. Your CPA can help identify areas that need improvement or changes. You’ll have enough time to implement them and potentially see your tax returns increase when Tax Day comes around.
CPAs will evaluate your mid-year point with regard to:
CPAs can also help assess the success of your business goals by comparing your year-to-date revenue with the same time period for 2018. You may find that the business isn’t achieving goals or growing at the rate you expected, in which case you’ll need to find out why and determine how to make changes. Knowing this information now will impact your decisions and goal setting going forward.
In the same vein, your business may be doing better than projected but you can still benefit from feedback on ways to keep it on track.
This is the most commonly asked question I receive from business owners. The best approach? Start asking it of your CPA, financial advisor, retirement plan consultants and industry peers to generate ideas and learn what has worked for other businesses. For example, our new tax laws have new rules that provide tax incentives to reinvest in your business.
Does your business have significant growth or net cash flow that you don’t want taxed? One option might be to utilize retirement plans that go beyond a traditional 401k plan, such as cash balance and defined benefit plans. These can allow you to defer income of $100,000 to $200,000 per person every year, depending on your age and income. If you and your spouse co-own a company, you can potentially defer $200,000 to $400,000 into a cash balance or defined benefit plan depending on your income levels. If these funds would have been taxed at the highest federal tax bracket of 37%, you could be saving 40% or more because you’re not paying federal taxes, plus potentially any state income tax you might owe on these deferred funds.
You can also reap tax savings by investing in your company, including tax-advantaged preparations for a sale or purchase. Here are some ideas:
Don’t waste money by paying underpayment penalties to the IRS or your state. Estimated tax payments are due four times a year, and the next one is approaching in September. Meeting with your CPA now will enable you to re-adjust your estimated tax payments based on how your year is developing.
Recordkeeping throughout the year can be a tedious process, but it will benefit you later when tax season arrives. A mid-year review with your CPA gives you time to prepare and organize documents and gather your tax deductions, expenses and receipts. It also helps you figure out who owes you money. Careful, ongoing recordkeeping helps you make better business decisions and create more success within your business.
In summary, I’m not recommending that you skip that vacation to the mountains, beach or Europe, or decline the neighborhood BBQs, but reviewing your mid-year financials is always a great move. Scheduling time to meet with your CPA to review your year-to-date financials will help you plan for the rest of the year and determine what actions you can take to improve your business and reduce taxes. You’ll also be able to confirm you’re making the appropriate amount of estimated quarterly tax payments.
Your access to more accurate information, in turn, is critical to helping you accomplish your personal and financial goals – whether you’re making decisions on your own, with your internal key people or in working with your other professional advisors.
Nick Strain is senior wealth adviser and wealth advisory committee chair at Halbert Hargrove.