The end of the year is always a busy time for business owners. I tell my clients that tax planning is one of the most important activities to schedule in the last quarter of the year. That has never been more true than at the end of the second full year of pandemic and shifting business conditions. Solid year-end tax planning helps you know where you stand in 2021 and how to prepare for 2022.
What Is Year-End Tax Planning?
If you’re like many small business owners, you’re scratching your head at the very thought of year-end planning. What exactly does it mean? To put it simply, year-end tax planning is the process of looking at all of your tax options and determining how to move forward with your business. You're measuring performance, determining whether your business is growing or declining, and using those data to make future projections. It's your opportunity to recap the year, analyze the lessons learned, and make decisions about how to continue.
More importantly, tax planning will help you make smart decisions that will yield tax savings. This is done in a variety of ways. Working with your CPA or business advisor, you might find a way to:
- Reduce the amount of taxable income that you file;
- Lower your tax rate;
- Maximize your tax credits, all while avoiding costly tax mistakes.
TCJA Affects Tax Planning
The Tax Cuts and Jobs Act (TCJA) made some broad changes that made the tax code more complex. Effective planning with your CPA or tax advisor will help you determine your business and financial strategy moving forward and facilitate a smooth transition to 2022. Your CPA financial planner or small business advisor is well versed in the new tax code and can employ a variety of tax planning strategies. A comprehensive review might cover cash flow, risk management, investment planning, or any other planning issue that needs to be kept fresh and updated.
Many small businesses will face entity choice decisions and may consider the tax benefits of restructuring to a more business-friendly entity.
"One of the most convoluted sections of the Tax Cuts and Jobs Act is new Section 199A, which provides a 20 percent deduction on “qualified business income” of a qualified business, operated directly as a sole proprietorship or as a pass-through entity."
Source: Accounting Today
Year-end tax planning is an important part of running a successful business. If you want to thrive, you need to have the right strategies going forward. With the help of your tax advisor, you will find the right strategies for your business. Then, you can lower your tax rate while getting the most out of your income and deductions.
This article was originally published in 2019 and has been updated to reflect current economic conditions and demands on small business owners, today.
Charles P Myrick CPA, a Washington DC tax preparation firm, specializes in accounting and tax planning services for new business start-ups and entrepreneurs. If you are a new entrepreneur, give us a call. We invite you to learn more about the small business accounting services that are available: (202) 789-8898.