While nobody likes paying taxes, it is an inevitable part of running a successful business. But while taxation cannot be avoided, there are still many ways in which business owners can legally and effectively decrease the amount of taxes they owe the government each year.
Filing taxes—contrary to what you might assume upon reading the IRS’ limitless tax code—actually affords the filer a considerable amount of flexibility. Whether you are filing taxes as an individual or filing taxes as a business, making strategic choices as a business can have a tremendous impact on your bottom line.
By hiring an outsourced accountant, your business will be able to identify new opportunities for reducing the taxes it owes, both in this coming tax year and in the future. Outsourced accounting firms can help with many components of financial planning, including managing your books, creating projections, and developing and implementing your business’ tax strategy.
In this article, we will discuss how better financial planning can effectively help reduce your business’ ongoing tax liability. With just a few small changes, your business can limit its liability and, in turn, improve your financial situation as a whole.
Consistent Accounting Standards
While the Generally Accepted Accounting Principles (GAAP) helps establish basic norms for accountants and accounting firms, accounting—as a general practice—still offers a considerable amount of flexibility. If your business has disorganized books or has recently undergone a major transition (such as a merger or a buyout), it will be crucial to make sure that your accounting choices are universally applied.
For example, one component of the accounting cycle that offers some flexibility is inventory valuation. Using weighted or straight-line depreciation methods will have a direct impact on your balance sheet, as will choosing between a FIFO (first in, first out) inventory method and a LIFO (last in, first out) inventory method. In the event you are audited, you will want to make sure that you can justify every item on both your balance sheet and income statement (and explain how each value was obtained).
More Tax Deductions and Tax Credits
Hiring an outsourced accounting firm can help your business identify new opportunities for tax deductions and tax credits and ultimately improve your bottom line. If you are a business owner, there are seemingly limitless items that could potentially be deducted from your year-end tax statements, including the recently—and perhaps controversially—included “three-martini lunch.”
Keeping careful track of all expenses and revenues will make it much easier for your business to identify opportunities for legally reducing the tax you owe. A qualified accountant can help you categorize each of the expenses, match them with possible deductions and credits, and develop a comprehensive tax strategy that is compatible with both the law and your business’ specific needs. The tax code is thousands of pages long, so it will be important to have someone qualified by your side, answering whatever questions you might have.
Strategic Revenue Recognition
One of the easiest ways to reduce the amount of taxes you owe is to (legally) reduce the revenue you are claiming. In many situations, you may have some flexibility for when you recognize certain revenues. If a revenue stream can be delayed to another month, quarter, or tax year, you might be able to delay when the corresponding tax is due.
While there will not be a way for you to avoid these taxes altogether, having some flexibility can be very beneficial in certain situations—such as sudden revenue interruptions or unexpected challenges. Your business will need to start by determining whether you want to use a cash or accrual accounting method. From there, you will need to check your books to ensure that this standard is consistently applied. Once again, it becomes easy to see why having an experienced accountant can be so beneficial.
Access to Additional Capital
Being able to access additional, outside capital is one of the best ways for your business to address cash flow challenges, without necessarily accruing additional taxes. Whether you want to apply for a standard business loan, a Small Business Administration (SBA) loan, or any other type of private financing, you will need to have clean books and a detailed financial plan.
Publicly, as was seen multiple times throughout 2020, there might also be opportunities for financing with limited tax liability. The Federal Government distributed trillions of dollars to help businesses of all kinds stay afloat. Unfortunately for some businesses, these funds were utilized quite quickly. Better financial planning can help put your business in a better position to take action, no matter what the future has in store.
Easier Restructuring
Restructuring is one of the most common methods for a business to limit its tax—and potentially legal—liability. Transitioning from a sole proprietorship (such as an LLC) to a corporation, for example, will enable your business to operate as an independent, liability limited entity.
If you are considering restructuring, it will be crucial to hire an outsourced accountant that understands the paperwork and bookkeeping involved in the process. You may be surprised just how much a simple restructuring can reduce your tax liability, but if you are going to do this, you will need to be sure to do it right.
Long-Term Focus
Lastly, perhaps the most important key to reducing your tax liability is to develop a long-term focus. Without a commitment to thinking about the future, in addition to the present, your business will make poor financial choices, pay more than it needs to for certain expenses, and also likely pay more taxes than is necessary.
Having a long-term focus is especially beneficial for accounting components such as budgeting, inventory, portfolio management, statement automation, and others. As soon as you meet with your accountant, they will help you identify your current needs, recognize your financial goals, and help you chart a path to help you get to where you want to be. While taxation will remain an inevitable component of running a business, there are many things you can do to help reduce your ongoing liability and position yourself for sustained success.