Tax Planning a Year-Round Journey
If you ever crammed for a test at the last minute in school, you probably remember the panic and dread you felt as you flipped through index cards or struggled with study questions or tried to memorize a semester’s worth of scribbled notes.
Tax preparation can bring on a similar feeling. You know you’ve had all year to organize your receipts and estimate your income. Even when the 1099s and W-2s start rolling in, you still hold that April 15 date in your mind, knowing that you don’t have to buckle down just yet.
But tax preparation should be a marathon, not a sprint. There shouldn’t be any major surprises when you finish entering the numbers in your tax software or pick up the big, scary envelope from your accountant. Getting ready for income tax should be a mindset, a year-round awareness that the lion’s share of your financial transactions will have some degree of impact on the current year’s tax obligations.
Making it a Habit
If you’re involved with your company’s accounting (and especially if you’re doing it all), you undoubtedly work from some kind of to-do list or a series of scheduled reminders. Send invoices. Pay bills. Collect timesheets. Receive payments and record deposits. Order products.
You don’t have to add Think about April 15 to that. There are actions you can take at regular intervals throughout the year, things that would be easier with the help of:
- An accounting website and/or,
- A professional financial advisor.
A cloud-based accounting solution can help you organize and manage tax-related data.
Tax planning should work in concert with your overall financial planning: You can’t separate tax and accounting. But you can set aside time throughout the year to focus on the impact your income and expenses will have on those finalized IRS forms and schedules.
Here are some suggestions:
Every April. By now you know how your finances fared in last year’s tax return, and you have a comprehensive report on your financial status. Pull out your business plan and evaluate your progress. Look closely at the financials, especially those income tax projections. Do you need to modify your plan?
Monthly. Look closely at the totals for your sales, purchases, and expenses from the previous month. Did your revenue exceed your outgoing funds? How does that compare to the previous month? Who is behind on paying you, and are you delinquent with any vendors? How does your budget compare with reality?
This kind of information can take countless hours if you’re assembling it manually. Cloud-based software can provide answers in seconds, or outsourcing to an accountant can take these things off your plate altogether. And you’ll need those answers going forward – especially when you pay estimated taxes.
Quarterly. Meet with your accounting professional. He or she can help you come up with a number for your estimated taxes and analyze the complex financial reports that should be created at least once a quarter (Balance Sheet, Income Statement, etc.).
Every November/December. The final months of the year are critical for tax planning. You’ll need to decide how aggressively you’re going to pursue outstanding accounts receivable. You may want to either step up your collection efforts or defer some income to the next year.
It goes without saying that you should get your accountant’s advice on this issue. You’ll also want help determining whether it would be advantageous tax-wise to make charitable donations, buy needed items, etc.
Many of these suggested ideas involve regular input and analysis by an accountant. If you don’t have one, consider initiating an ongoing relationship. These individuals and firms do far more than just deal with numbers. They can help you employ technology that will improve your accounting workflow and its accuracy.
Accounting professionals also serve as business consultants, advising clients on, for example, setting financial goals, monitoring cash flow, and long-term planning. And of course, they’re the experts on the IRS tax code, and will work to minimize your tax obligation by staying abreast of your financials year round.
Many of your competitors are getting this kind of support, and it’s helping them become more nimble, more prepared to grow, and less stressed every April 15. Consider getting that same edge for your company.