Over the next few months, people will drag loads of documents, files, and information into their tax preparer’s office to have their tax returns filed. To the uninitiated, the process can be daunting and stressful.
It leaves a lot of people with anxiety around what their final tax bill will look like. Especially business owners who didn’t have a good year and didn’t pay enough in estimated tax payments throughout the year.
The anxiety worsens when they realize they already made a huge tax mistake, and they can’t fix it just yet. At least not for their 2016 returns.
Asking the Right Question—at the Wrong Time
When I was a staff accountant and new in the business, I used to see this process play out all the time. Business owners would come in, have their returns prepared, and become upset or frustrated at how much they owed. Then came the same question, from almost every one of these owners, every year: “What else can we do to lower our taxes?”
The answer these hard-working entrepreneurs received each year wasn’t very appealing. Usually the solution was to double-check some figures, make sure they weren’t missing any deductions or credits, maybe make an IRA contribution if they qualified and hadn’t done so already. But nothing was proposed that would move the needle to a point where the client felt satisfied. There were many times where the client couldn’t do anything else to save money because it was simply too late.
By the time this entire process is over, the business owner is most likely burned out dealing with taxes and just wants to go back to running the business, living their life and hoping that the results next year won’t be so bad. And herein lies the problem. This is a vicious cycle that needs to be broken.
The IRS Doesn’t Let You Rewrite History
If you walk into your accountant’s office during tax season wondering how you are going to minimize your taxes, it is already too late. It simply does not matter how good your accountant is with a stack of receipts on April 15th. If you didn’t know that you could write off your kid’s braces as a business expense, legally shift income to a lower tax bracket, or turn your home into a tax-free revenue-generating event space, there’s nothing you can do after December 31st to fix any of that. You lose those deductions forever!
The first thing you must realize is that after December 31st, the most useful tax strategies and savings ideas turn into pumpkins and, just like Cinderella’s carriage, become essentially useless. Knowing this fact, it should make sense that the single biggest thing you can do right now to lower your taxes is to start planning for this year.
And I’m not simply talking about sitting down with the accountant who has prepared your taxes for years without giving you any major ideas to save money (although having a current-year conversation with your tax pro is better than doing nothing at all).
Don’t take this the wrong way—typical tax professionals do a great job of recording the history you give them. They can put all your numbers into the right boxes on the right forms and file them by the right deadlines. But if your bank account is still suffering after paying your taxes, it might be time to get a second opinion about your plan.
Avoid Making the Same Mistake in 2017
Developing a strategic tax plan that aligns with your goals and dreams is the key to beating the IRS legally and reducing your taxes to the legal minimum. And the sooner you start, the more time you allow these planning strategies to work for your business.
Case in point: One business owner who engaged my firm in the middle of 2016 still needed to file his 2015 tax returns. We developed his plan for the rest of 2016 and beyond, and prepared and filed his prior-year tax returns. Even though his overall income did not change much from 2015 to 2016, he will pay nearly $12,000 less in taxes in 2016. And this result came mostly from implementing one strategy to correct his company’s foundational structure!
Truly proactive tax planning gives you the concepts and strategies you need to minimize your taxes on an ongoing basis. It tells you what you should do, when you should do it, and how it should be done.
And proactive tax planning gives you two more valuable benefits.
First, it’s the key to your financial defense. As a business owner, you have two ways to put cash in your pocket. Financial offense is making more. Financial defense is spending less. Taxes are probably your single biggest expense, so it makes sense to focus your financial defense where you spend the most.
Second, proactive tax planning guarantees results. You can spend all sorts of time, effort, and money promoting your business. But that simply cannot guarantee results. Or you can set up a medical expense reimbursement plan, deduct your daughter’s braces, and guarantee those savings.
So, before you get burned out from dealing with taxes this year, figure out who you can talk with soon to start developing a proactive tax strategy that guarantees you savings for this coming year and many years into the future.
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from Fundera Ledger https://www.fundera.com/blog/tax-mistake