End of Year Tax Planning for Small Business Owners

Wondering how to prepare your business or startup for tax season?

Tax season is right around the corner as the year comes to a close. Even if tax filing seems far off, the end of the year is when you should be preparing for tax preparation and tax filing as a small business owner or entrepreneur. Many of our clients contact us with similar questions about taxes in the month of December, so we’re publishing our top three tips for preparing your small business for tax season.

1.    Should I buy stuff before the end of the year?

This is probably the single most popular question we get. 

You’ll hear several different schools of thought on this, but here’s our take (which we feel pretty strongly about):

Buying equipment - like a new computer - is a tax deduction if you own a business (and you use it for your business). Does that mean we would advise someone to go and spend all their money just to lower their taxes?

Absolutely not. At the end of the day, you're still paying for it out of pocket - so having no tax deduction at all is better than spending a thousand bucks on something you don't need.

So our advice is plainly this - make your decisions based on what makes the most sense for your business at the time you make them and let the taxes work themselves out.

All things being equal, is it better to take a deduction this year vs. a deduction next year? Yes. Is that always the case? No. For example, if you expect your income to grow next year and push you into a higher bracket, a deduction at a higher rate (next year) is worth more than one at a lower rate (this year).

2.    Plan ahead and set the cash aside.

You’ll need to understand what to expect your tax liabilities to be by having a good estimate about what your taxable income is. So what is your taxable income? Most businesses pay taxes on a cash basis (if you’re unsure, check with your tax accountant). So you’d only pay taxes on what your net income is.

Based off your net income, you’ll know what your taxable income is and you can prepare to pay the tax liability that will come due. It’s critical for cash planning that you set aside money ahead of time, now, so you can cover the costs in a few months.

Here’s an example of when cash planning comes in handy:

-Say you have a net income of $50,000 in 2015 and you didn’t make large estimated tax payments throughout the year.
-You get a $15,000 tax bill (depending on your entity type and personal tax situation).
-You hire someone in February and the costs reach $40,000, taking you down to $10,000 in the bank.
-When March rolls around and it’s time to pay the $15,000 in taxes, you’re in a $5,000 hole.

Moral of this story? Get an idea of what you will owe and set it aside.

3.   What are my obligations to my contractors?

If you paid someone who qualifies as an independent contractor, meaning you paid them more than $600 in the year, you have an obligation to issue them a 1099-MISC. So make sure you have a name, address, and TIN on file for them and that you get it to your accountant so they can file 1099’s for you.

An even better idea? Have your contractors fill out a W-9 Form when you hire them so you have their information and social security number on file.

If you pay your contractors via PayPal or credit card, there’s a plot twist: you don’t actually have to file a 1099 for them (even if you paid them over $600). The third party vendors will take care of all the reporting for you. They will fill out a variation of the 1099-MISC called the 1099-K.

If you hire and pay an employee or contractor without having their information (enough to fill out a 1099-MISC Form), you could face a penalty from the IRS. So, stay on the safe side and make sure you have everything you need before you pay new contractors.