The tax system is extremely complicated and is getting even more complicated as time goes on. That is why people turn to tax experts to help them appropriately manage their tax liability. In fact, the industry for tax preparation services in the United States alone is worth more than $11 billion every single year!
Of course, improving tax planning can take a lot of work. At the same time, there are a few simple strategies you can use to provide you with the maximum benefit for the minimum investment of time and labor.
So what exactly are the most important things to focus on when it comes to your tax planning? Read on to learn all about the most important ideas you should keep in mind to take your tax planning to the next level!
What Is The Profit First Method?
One of the most important strategies to use during your tax planning is the profit first method. The profit first method is a legitimate tax strategy to increase your expenses.
The profit first method exists in contrast to a more traditional analysis method. According to the traditional formula for calculating profit, you subtract any explicit expenses from your sales. Whatever is left over is your profit.
This system leaves you with a certain amount of profit. That profit will be a big part of your tax liability.
However, the profit first method allows you to calculate your profit amount differently. And fortunately for you, it allows you to calculate it in a way that lowers your total profit. That means lower tax liabilities as well.
According to the profit first method you start with the total sale amount. You then subtract anything that you can explicitly categorize as a profit. Whatever is left over is considered to be an expense.
This method brings other benefits with it as well. It also allows you to keep closer track of all the ways in which your sales are not as profitable as you might like to think. This might make you feel like you do not have as much good news to celebrate.
However, it gives you a more honest assessment of the real success of your business. And it lowers your tax liability on top of that. That is something to celebrate!
Remember The Qualified Business Income Deduction
There are a lot of businesses that qualify for the qualified business income deduction. However, not every business is aware of this. That is because the law only came into effect a few years ago in 2018.
Basically, this deduction allows you to deduct 20 percent of your qualifying business income. However, this only applies to businesses that are partnerships, S corporations, or sole proprietorships.
On top of that, it only applies to ventures that pass their income and deductions on to other people. That generally means owners and shareholders.
If you qualify for this deduction, you will definitely want to make the most of it. A 20 percent deduction is nothing to sneeze at!
Use A Retirement Plan As Part Of Your Tax Planning Strategy
It can be extremely complicated to plan for retirement. In fact, it is so complicated that the government prefers not to do it. Instead, they have provided tax incentives to encourage businesses to do that planning for them.
That is why you might want to fund a retirement plan as part of your tax planning strategy. The money that you contribute to a retirement plan will allow you to defer your taxes.
In some cases, you will be able to defer your taxes for years. That will give you time to spend your money on growing your business and increasing your profitability.
Then, when the time comes to pay your deferred taxes, your growth will leave you with more than enough extra money to do.
Focus On Credits During Your Tax Planning Process
Tax credits are even more beneficial than tax deductions. The more of them you can get, the better for your bottom line.
There are all kinds of things you can do that might still be able to qualify you for more tax credits. These include things like increasing your environmental consciousness. You can also gain tax credits by hiring more employees or by making sure that your business is accessible for disabled people.
Buy Equipment To Lower Taxes for Businesses
You can also decrease your taxes by writing off amounts used to purchase business equipment. And if you immediately put some of your new assets to work, then you can deduct as much as $1 million.
Use The Power Of Timing When Filing Tax Returns
You probably have some flexibility about when you make certain purchases. If you time them right, you can positively affect your tax liability.
For example, if you want to buy something next year, you might consider buying and paying for it this year. Or you can pre-pay for it.
Either way, you can increase your expenses and decrease your net income. That means lowering your tax liability.
Understand Everything You Need To Know About Improving Tax Planning
We hope that some of the ideas in this brief article about the most important things you need to know about improving tax planning have been helpful for you. Many people find tax planning to be one of the less interesting parts of managing finances. However, there are very few things that you can do that will have such a disproportionate effect on financial health.
That means learning more about tax planning is an investment that will more than pay for itself. To learn more about how to improve your tax planning or to speak with experts who can help you with the process, feel free to reach out and get in touch with us here at any time!