How to Start Tax Planning
Start a filing system
Start a filing system to organize your documents. Any successful tax planning strategy requires you to maintain records of all transactions and receipts that may affect your tax return. This helps to keep track of important documents and avoid forgetting about transactions that occur months before the tax filing deadline.
Understand tax deduction requirements
Before you get too far along in the tax year, you should evaluate all available IRS deductions and the requirements to claim them. By doing this beforehand, you can be proactive in preparing to claim a deduction at the end of the year.
Evaluate the tax credits offered
Tax credits offer a significant opportunity to save money on income taxes since they reduce your actual tax bill on a dollar-for-dollar basis. The types of tax credits offered each year change more frequently than deductions. Credits are often available for a limited time and cover specific types of expenses.
Use an IRA
Use an Individual Retirement Account (IRA) instead of a savings account. Many taxpayers put their savings into a typical bank account that earns taxable interest. However, you can avoid paying tax on the interest each year by depositing money into a traditional IRA instead where the interest will accumulate tax-free. When you do, you might also be also eligible to claim a deduction each year for a certain amount of contributions you make to the account.
Good tax planning includes good recordkeeping
Taxpayers should develop a system that keeps all their important info together. They can use a software program for electronic recordkeeping. They could also store paper documents in labeled folders.
Throughout the year, they should add tax records to their files as they receive them. Having records readily at hand makes preparing a tax return easier.
It may also help them discover potentially overlooked deductions or credits. Taxpayers should notify the IRS if their address changes. They should also notify the Social Security Administration of a legal name change to avoid a delay in processing their tax return.
Records that taxpayers should keep include receipts, canceled checks, and other documents that support income, a deduction, or a credit on a tax return.
Taxpayers should also keep records relating to property they dispose of or sell. They must keep these records to figure their basis for computing gain or loss.
In general, the IRS suggests that taxpayers keep records for three years from the date they filed the return.
What Is a Tax Advisor and How Do You Choose One
Specially trained enrolled tax agents must pass a rigorous test and meet annual industry regulatory requirements to meet and sustain their professional credentials. Enrolled agents are licensed by the federal government, and are fully approved to represent clients before the I.R.S. They also provide general consumer and business tax services like preparing income taxes and offering specialized tax planning advice.
Certified public accounts (CPA)
A certified public accountant shares many of the same attributes as an enrolled agent, but with a key distinction. While enrolled agents are licensed by the federal government, a CPA is licensed by the state where they set up shop, and must complete 150 hours of undergraduate and/or graduate school study and clear a CPA test given by the American Institute of CPA’s
How to Find a Tax Advisor
No matter which type of tax advisor you choose, finding one isn’t difficult. You can either opt for word-of-mouth (asking co-workers, neighbors, family and friends for recommendations) or through industry trade groups.
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Make sure to vet your tax advisor
Unfortunately, there’s been an uptick in shady, fly-by-night tax preparers in recent years. So, job one is to thoroughly research a tax advisor. Ask for professional credentials and references – any tax advisor who can’t deliver on either front should be dropped from your list. Also, check your local Better Business Bureau for any record of complaints against a specific tax advisor.
Tax Preparation Tips Every Entrepreneur Should Know
Hiring employees vs. hiring subcontractors
Your business is ready to bring on employees, but should you pay them as W-2 employees or 1099 subcontractors? It’s a good question, and one Seaman is asked a lot. Freelancers work in their own environment and are hired on a project-by-project basis. Employees work regular hours, which are dictated by the company, and receive regular checks. If you get the two mixed up, you could be in for a big surprise, Seaman says.
Keep your accounts separate
No business owner is 100 percent sure if the business will float when it firsts opens, but that’s no excuse to run your business from your personal bank account. When you start a business, get a business checking and savings account and make sure business income and expenses come out of the business account, Seaman says.
Get your payroll straight
From income tax to Social Security, the IRS gets a little touchy if you’re not paying your dues. There are a lot of tax forms and scheduled payments that come with employees, so it’s important to understand the ins and outs of payroll, Seaman says.
Take a startup deduction on taxes
The expenses you rack up while preparing to start a business can be used as a tax deduction, Seaman says. “Be sure to take the allowable deduction for a startup,” she reminds entrepreneurs. “You can deduct up to $5,000 of research and development and startup costs.” Research and development deductions can include investigating whether or not the business idea is viable, training employees, and ordering supplies
You can claim the wear and tear or deterioration of business items over time. For example, you can claim the depreciation on your business computer or the fleet of company cars. According to the IRS, tangible items like buildings, machinery, vehicles, furniture, and equipment are depreciable. Intangible property like patents, copyrights and software is also depreciable. You can claim depreciation of property over time to help your tax situation a little each year, or you can take it in one lump sum
Great Year-end Business Tax Planning Tips
How the 2017 Tax Changes Affect Year-end Tax Planning
The 2017 Tax Cuts and Jobs Act (the “Trump Tax Cuts”) should be a factor for your business tax planning for the 2018 tax year and beyond.First, take a look at the new 20 percent deduction from net business income that’s available to small businesses. There are some restrictions and limits. Second, look at the deductions and credits that are no longer available, like the deduction for entertainment expenses.
Save on Taxes by Stocking Up and Pre-Paying
As mentioned in Step One, you can increase expenses (and lower profits) by stocking up on inventory and supplies and pre-paying expenses. If you have any cash sitting around, or you can reasonably use your credit line or a business credit card for purchases, stock up on supplies
Save on Taxes by Setting Up a 401k Plan for Employees
If your company will be profitable this year, and you have some excess cash, you can save on taxes by setting up a 401(k) or Safe Harbor 401(k) for yourself and your employees. Even if you have a sole proprietorship, you can still use a 401(k) to set aside money for your retirement and save on business taxes. In fact, the process is easier with no employees, because there are fewer rules.
Write off Bad Debts to Save on Taxes
Bad (Un-collectible) debts can be written off before the end of the year and the uncollected debts can be used to lower your profits
Writing Off and Writing Down Obsolete Equipment and Inventory Can Save on Taxes
Obsolete, damaged, or worthless equipment can be taken off your accounting records to increase your expenses and lower your tax liability