Spend, Save & Invest Strategically to Finish 2020 Strong
Although it’s hard to think about that tax bill due next April, the strategic financial decisions you make today for your business can help to drastically minimize your tax burden at year-end. Consider these tips that let you invest strategically in your business and your future.
Keep Your Financial Records Up to Date
Reliable data is the key to making the best business decisions. Every business needs to reconcile its finances at least once annually to ensure accuracy (although monthly is preferable). Consider an outsourced controller—available through some accounting firms—who can review and reconcile your business books with an expert eye to diagnose financial opportunities and make strategic tax recommendations.
Reduce Your Salary, Increase Owner Distributions
According to IRS statistics published by TaxFoundation.org, S Corporations pay a 15.3% payroll tax on owner wages for the first $117,000, 2.9% on the next $83,000 and 3.8% on all income over $200,000. But, there are no payroll taxes on owner distributions. Therefore, lowering your salary while increasing distributions can be a powerful strategy for reducing your tax burden. Ask your accountant to help you determine an appropriate owner wage that will be acceptable to the IRS and strike the right balance of salary-to-distribution for your business.
Pay Quarterly Estimated Taxes
Budgeting cash flow based on tax projections and paying quarterly estimated taxes ensures there are no surprises come tax time. If you earned considerably more this year than last, expect to owe a significant amount more on April 15. This is another topic you will want to bring up with your accountant.
Fund Your Retirement
Business owners can defer income tax today by saving for the future. Set aside earnings in retirement plans such as a 401K or IRA to reduce your taxable income for 2020. Additionally, retirement plans are protected from creditors, so you are also creating a safety net that’s not vulnerable to business risk.
Consider Your Home Office Deductions
Many business owners had to work from home this year due to the pandemic. When any work happens from home, or you use tools and resources from home, you might be able to take advantage of several tax deductions. Typical home office expenses include Internet, phone, mileage, and a percentage of rent or mortgage plus utilities for a home office.
Choose the Right Accountant and Tax Advisor
A good, qualified accountant can guide you in putting the above-mentioned business finance practices into play, optimizing your tax savings. However, you also need a reliable tax advisor who is an expert at tax law to address any specific taxation issues and concerns. Read our blog with Tips to Choose the Right Tax Advisor for Your Business.