Small business owners often forget and ignore paying their taxes until they get caught by tax officials. However, every penny counts when it comes to small businesses, and you cannot afford to lose any in paying extra taxes. Therefore, it is essential to understand the need for tax planning to increase your revenue and create a lower tax liability.
Are you paying your tax or dodging it till the end of the financial year? If you haven’t registered yet, get ready to bear the heavy consequences. It is better to pay now than repent later.
Tax planning is a continuous process, and having a decisive and precise plan will help you reach greater financial stability and credibility. As a result, you can go home with higher returns!
Make sure that you keep your records straight and ready from the start of your business. Also, don’t forget to maintain track of all the resources and investments before the financial year begins.
If you are unable to manage your taxes alone, you can seek help from Tax Plan Advisors. It will help you get the best tax planning advice!
Benefits of Tax planning
1. Reduce the total amount of tax
Running a small business is difficult as money earned is almost equal to the money spent on resources. By the time you make your profits, you would have to pay your taxes.
Tax planning plays a vital role in analyzing the various places to claim a reduction in the tax to be paid. The process helps you distribute the liabilities among resources, manufacturing, processing, production, and many more.
This way, the total amount to be paid gets reduced, and you can have a more significant share of profits. It is essential to segregate and divide your budget into every department. This way, you can have more opportunities to reduce your total amount of tax.
2. Lowering the tax rate
Tax is applied only on the taxable income. For instance, you can divert your taxable income into new investments, savings accounts, mutual funds, municipal bonds, insurance payments, and more.
In that case, you can show a lower taxable income on paper but secure your income at the same time. After the initial gains of the organization, it is better to invest 80% of it back into the organization in different forms.
The research and development department receives the highest investment of returns and the least tax. The tax rate will automatically reduce as the taxable income becomes very low. Investing in insurance and R&D can take a huge dip in tax rates.
3. To make strategic decisions in the year-end
Tax planning helps you estimate the total amount of profits and loss well in advance. This act gives you leverage to direct your next financial year in the way you want.
Your excess profits can be invested into new development or new ideas for expansion in the small business. You can invest the profit in the share market to invite shareholders as well.
This way, small businesses can quickly grow and establish themselves in the market. The accounting books will help you understand various opportunities where tax credits are claimed and taxable income is reduced.
4. Control tax period
Handling the account books gives you the authority to manipulate and precisely plan your tax-paying dates. This act provides you the opportunity to manage your finance and profits in an organized manner ahead of time.
Business strategic plans can be made by controlling your tax period. New departments and business ideas can be implemented. You can invest and reinvest your earnings back into the company and expand your organization.
Account books can give clear ideas of different resources to claim your tax credits and increase your tax liabilities. You can plan out business plans for the next few years without any trouble with tax.
5. Control Alternate Minimum Tax
The Alternate Minimum Tax or AMT is the least amount of federal tax paid by higher-income individuals. If your small business is flourishing with a higher income, you might have to pay the least amount of AMT. But if you can plan your taxes, this can be reduced and sometimes even avoided.
AMT is mandatory for anyone earning above the limit. It comes to almost 10% of your income and causes a great loss. But if you can plan your taxes right and organize them in a precise manner, this can be reduced and sometimes even avoided.
You can avoid and reduce AMT by following these measures:
- Don’t register bonds and stock options in your name
- Live in an area with a lower estate tax
- Do not hold private activity bonds
- Show your family income not more than $113,400
- Make pre-tax contributions to FSA’s
- Claim tax credits
Small businesses have an urgent need to plan their finances and maintain their ledger books. Tax planning will help them retain their earnings and help them invest in many more sources to maximize their profits. But at the same time, they can also reduce their tax liability.