Money Tip: Tax Planning Before the End of the Year

As we’re nearing the end of the year, it’s a good time to start thinking about taxes. Why think about taxes in October when they’re not due until April? Because even though it’s true that you still have 6 months before you have to file, the decisions you make before December can impact how much you owe or is owed to you. It’s much better to know now so you can adjust as needed before it’s too late. As always, here’s my disclaimer that I am not a CPA or tax professional, but as a business owner I think it’s important to at least understand the basics of accounting and taxes and how all of it affects you. I’ve said it before, but I encourage everyone to build a relationship with a solid CPA. Even if you are capable of doing your own taxes, the laws change all the time and it can be hard to keep up. They have to keep up to keep their licenses. And it never hurts to have a CPA’s signature on your tax return. I like to think it gives me an extra layer of protection. I trust my accountant to guide me in the right direction with my deductions and everything else. For most of us, our fiscal year is January through December, meaning that’s the period we report our income and expenses to the IRS. So if we wait until March to start reviewing our numbers for the April deadline, it’s too late to make any changes that could help us financially. That’s why I’m talking about this in October. In a couple weeks, I’ll meet with my CPA to review where I’m at for the year, and he’ll make some recommendations for what I should do to minimize my liability. Sometimes that means paying myself a higher salary. Even though that means I’d have to pay more in payroll taxes, it also means I could contribute more to my SEP IRA, and the return on that investment is more beneficial to me than the extra expenses. I file as an S Corp so I have to pay a salary. If you are a sole proprietor or LLC, that’s not the case since it all flows through to your personal return. But your accountant might advise you to spend some more money before the end of the year. Maybe it means buying a new computer or other equipment you need that will reduce your taxable income. It’s a weird thing, right? I’m someone who likes to save, so if I have a really good year like this one, ideally I want to squirrel away as much as possible. It’s not my norm to think about how I can spend more. But if I don’t buy some things I need for my business, I’ll end up paying more in taxes. If I’m going to spend the money either way, I’d rather spend it on some stuff that will be useful instead of sending it to the IRS. And while I’ve heard accountants say you can’t spend your way out of paying taxes and believe that is true, my CPA has saved me quite a bit. If you find yourself in a position where you need to spend more at the end of the year, it means you’re doing well. It’s weird, but it’s not a bad place to be. I’m often met with resistance when I recommend hiring a CPA, especially to people who are fairly new in business. The initial reaction is usually that it’s going to be too expensive and they don’t think they’re at the point where they can afford or need it. I beg to differ. My CPA always says if he doesn’t save me more than his fees cost, I should find someone new. It’s true. The costs might seem intimidating up front, but if you’ve done your research and hired someone reputable, it’ll pay for itself. How do you find a good CPA? When I say you should build a relationship with one, I mean you want to work with someone long-term who will get to know you and your business and can better advise you. Someone at one of those big chain tax services won’t necessarily give you the same level of care, so I’d stay away from them even if the price tag is appealing. I’m sure they have great people, but I’ve also heard some horror stories. I always think getting recommendations from someone in your industry is the best place to start. You want someone who understands the nuances of your part