If small business owners knew what to do after tax season, we’d see tax savings increase next year by wide margins. So what do you do after tax season and why? It’s simple: Think about it.
Let’s start small: Focus on activating your memory. Find a quiet place to sit down and run backward in your mind.
List every issue, every miscommunication, and every broken process, externally and internally. Remember areas of confusion and uncertainty. Note instances of communication breakdowns between your business and your Certified Public Accountant (CPA) firm. That’s a big one.
So, today’s article is about a clear objective: pay less money in taxes next year.
Are you ready to dump the “file and forget” mindset and refocus on debugging your internal tax and accounting processes? Patching holes? Opting for more services?
Some business owners struggle with delegating: that’s the negative side of the D.I.Y. mindset, and it can prevent business owners from achieving consistent growth. It’s critical that you prioritize your business over any D.I.Y. urges. You may need help cleaning up your books. You may need a tax plan, and you may need to fire your accountant.
Were you surprised?
Here is the question I encourage my clients to ask themselves after they file their taxes and pay their tax bills: “Were you surprised?”
If you answered an affirmative “yes,” that means we have a problem. Business owners should not—I repeat, should not—face large-scale uncertainty during tax season. Instead, you should know your taxable gross income, be familiar with tax saving strategies, and receive accurate estimates regarding your business tax bill or your quarterly estimated payments.
Here are the common causes of uncertainty.
- Disruptions in accounting and reporting processes
- Inadequate information in performance indicators
- Poor oversight in accounting and bookkeeping
- Communication bottlenecks that keep financials siloed
- Exceeding the qualifications of in-house tax professionals and accountant
- Work with a CPA firm that does not prioritize your business
Mistakes happen. But they shouldn’t happen twice. Think through the six points above. Does anything feel familiar? Listen to your gut and act.
Today, I want you to ask yourself five essential questions. If you can find a solution for each, congratulations. You’re ahead of the competition and on your way to tax savings in 2024.
1. Did my tax bill match expectations?
If your business income increased compared to last year, there’s a good chance you paid more in personal and business taxes. This is a good thing. You make money; you pay more in taxes. Forget refunds.
Either way, your tax bill should not have deviated significantly from expectations.
Here’s the takeaway: When your tax bill deviates markedly from expectations, there’s a good chance that communication and miscommunication are involved. Generally, a business that is strongly integrated with its CPA firm—meaning centralized control of accounting, tax, and financial leadership—the lesser the deviation, the more accurately your taxes match expectations.
I’m going to be straight with you: If your business provided accurate financial statements to an accountant or CPA firm, and your team’s numbers were off significantly, firing is not off the table.
If you paid less, invest in better tax services
In most cases, if you’re paying less than you planned to, it means your profits were lower than planned, too.
Find out why. Was it a simple accounting error? The choice to use in-house staff over a qualified firm? Did you engage in tax planning? (If not, start now)
If you paid more, you’re not alone
If your tax bill expanded due to an unexpected change in tax law, know that you’re not alone.
This year, business owners felt the hurt after the 2017 Tax Cuts and Jobs Act that required businesses to deduct research expenses over five years rather than all at once. Some businesses saw tax bills rise by as much as 400%.¹
An increase like that is unfortunate, but it’s avoidable with proactive planning. Remember my mantra: no surprises.
2. Is my business structure effective and tax efficient?
This is one of the healthiest post-tax habits: Reevaluating your business entity structure and discussing it in detail with your CPA and tax attorney.
Here’s a quick refresher on common business structures:
- Sole proprietorship
- Partnership – (LP) & (LLP)
- Limited liability company (LLC)
- Corporation – S-corp & C-corp
Today, we’ll focus on opportunities related to LLCs and S-corporations.
Should I reevaluate? Here’s an example.
So, under what circumstances is it time to stop thinking and start doing when it comes to changing business structure? Here’s a scenario I see often, and it has to do with LLCs transitioning to S-Corporations.
From LLC to S-Corporation
Let’s say you started your business six years ago in Texas and filed a certificate of formation as a Limited Liability Company (LLC). Good choice. LLCs are flexible entity structures that combine the benefits of corporation and partnership business structures.
Startups structured as LLCs typically opt to be taxed as pass-through entities. For new LLCs, being taxed as a passthrough entity makes sense: Tax savings match income, and income matches administrative costs, which are lower for LLCs.
Revenue Increases Rapidly. Profit triples. What’s next?
Fast forward four years. You’re bringing in loads of new business and generating more monthly revenue than ever by a long shot. Now is the time to elect to be taxed as an S-corporation, though you’ll retain your LLC business structure.
Here’s a benchmark: If you took home more than $250,000, the extra tax savings from an S-corporation (vs. an LLC) is now worth the added administrative complexity and costs.
3. Am I missing sources of waste?
Waste is any activity that does not add value to the end product or customer. Identify areas of waste by looking for any areas of spending that are unnecessary.
Make sure your accounting this past year was consistent and accurate. If it wasn’t, and you’re relying on an in-house tax preparer, invest in an expert who will engage in year-round strategic tax planning.
Remember that it’s easier to optimize your processes and eliminate waste than to bring in new business.
4. Did I save everything I could from credits and deductions?
If you missed a deduction or credit due to poor tax planning, change your processes now. Find a new accountant. Go nuclear.
Tax credits and deductions significantly lower your tax liability. So get started now while there’s time.
File an amendment to correct mistakes
If you missed a deduction or credit simply because you failed to mark it on your taxes, that’s an easy fix.
Deductions and credits are one area where mistakes are correctable. You can file an amended tax return. Use IRS form 1040X, 1065, 1120S, or 1120X, depending on your legal structure.³
If you’re eligible for a tax deduction or credit, call a tax professional to explore filing.
5. What should I do with tax savings?
If this is your first year with your business, it may have come as a surprise when you did not receive a refund.
Here’s the situation: As a member of an LLC, you may receive a personal income tax refund, but that means you made less money than last year or overpaid. Bittersweet? Yes.
So let’s focus on tax savings and personal refunds. What do you do as an LLC with multiple members?
Use tax savings for growth, not wealth
If you’re a business that prioritizes long-term growth over personal enrichment, put those tax savings back into your business in the form of material and human capital or focus on outstanding debt.
- Upgrade equipment
- Pay down debt
- Hire new employees
Consider using the funds for capital infusion, generally. This will increase financial and operational stability.
What to do with personal refunds
Considering you received a refund because your business made less money, think about adding a portion of your individual refunds to bolster cash-on-hand, otherwise known as your float.
How much money do you need to keep in cash for a rainy day? Think about it, and err on the side of too much versus too little.
Unhappy with your tax savings? Make a change.
The fact is that most CPA firms don’t go the extra mile for clients, and businesses end with larger tax bills when they spread tax, accounting, and financial leadership services across multiple firms. The communication just isn’t there to produce results.
I’m leading my firm toward a new type of CPA service offering: enterprise-level tax, accounting, and financial processes adapted for small business owners.
Want a real partner? That’s us.
Schedule a discovery call with me today if you’re interested in a better 2023.
Talk soon,
Jeremy A. Johnson
References
- Rosenbaum E. Software firms across U.S. facing massive tax bills that threaten tech startup world survival. CNBC. 2023. Available from: https://www.cnbc.com/2023/04/18/software-firms-face-huge-tax-bills-that-threaten-tech-startup-survival.html
- Choose a business structure. U.S. Small Business Administration. 2023. Available from: https://www.sba.gov/business-guide/launch-your-business/choose-business-structure
- Forms & instructions. Irs.gov. 2023. Available from: https://www.irs.gov/forms-instructions
- Estimated taxes [Internet]. Irs.gov. 2023. Available from: https://www.irs.gov/businesses/small-businesses-self-employed/estimated-taxes