Most small business owners do not know what they owe in taxes. A single accountant or tax preparer is not qualified to provide tax advisory services that make tax bills predictable and reduce tax liability. If you’re wondering, “Why are small business taxes so high?” these are the services you’re missing.
Accounting and bookkeeping optimized for tax savings, not bean counting.
Avoiding big tax bills starts with the basics, so when important documents needed for small business taxes (e.g. financial statements, recipes for meal and travel expenses, and payroll documents) come from an in-house accountant, it’s best to get those tax documents reviewed by an accounting team focused on tax savings.
That means starting from the books and structuring transactions so that your financial statements are primed for deductions, credits, and allowances.
The Internal Revenue Service (IRS) won’t do the work your accountant or tax preparer missed.
Tax advisory services focused on planning rather than compliance.
Many small business owners enter into relationships with accountants or CPAs with faulty assumptions. “If a firm handles my accounting and taxes,” business owners think. “Surely they’ll look for tax reduction.” This is not the case.
Compliance and planning are different. Tax planning concerns what’s deductible and what’s not. Compliance involves filing forms; planning involves reducing your tax bill.
Why are small business taxes so high? The trouble starts when no one’s taking responsibility for looking into the top five commonly missed tax deductions. It’s an easy fix. But who’s steering the ship? The problem ultimately rests with accountants or accounting firms who fail to explain the difference between tax reduction (tax strategies and planning) and tax compliance (statements, documents, records).
Find out if your accounting knows tax planning with this test.
Ask your current accountant or firm about tax planning. Use the words “offer tax planning as a service.” Tax planning is essential, so listen to how they talk about tax planning. Is it a core competency? Firms that treat tax planning as an auxiliary service are not worth your time.
Reliable projections that inform decision-making and money management.
Tax planning is not always about saving money. A major benefit of tax planning is projections. What will you owe the IRS? Just knowing what is coming is half the battle.
Once you have projections and forecasts, the days of asking why small business taxes are so high will be behind you.
Smart budgeting for estimated tax payments.
When you know what you’ll owe to the IRS, you can budget for payments. And because budgeting involves subtracting estimated tax payments from revenue, it’s another insight you can use to grow your business sustainably.
Essentially, it’s useful information that shows your company’s performance in a broader context of tax savings and liability.
No surprises.
Advice on legal entity structures for tax purposes.
I won’t go too far into this today because tax structures are complex and touch almost every aspect of tax planning.
Here’s what’s important to know: electing to be taxed as a different legal entity is not the same as changing your legal entity structure. For example, a partnership may elect to be taxed as an S-corp.
You have lots of options, and if you execute this strategy at the correct time, it can be one of the most efficient tax reduction strategies for small businesses, and it’s critical to building generational wealth. Here are a few other notable benefits:
- Business tax savings
- Personal income tax savings
- Asset protection
So back to the question, “Why are small business taxes so high?” Here’s another reason why owners are confused: Small business owners do not know when to switch from an in-house accountant or slow-coasting CPA to a serious firm with a dedicated strategic advisor and partner—what we do.
Listen, if your small business has exceeded 1M in revenue, it’s time to pay for those who know the nitty gritty. It’s not abstract It’s straight business and big money.
Strong, accountable leadership partners for financial and tax matters.
Around 88% of small business owners use paid tax preparers to complete their tax returns. That makes sense for some small businesses, perhaps sole proprietors.
However, if you’re between 1M and 10M in revenue, your financials and tax strategy must be revenue-generating. To do so, you need an external partner who can step up and provide financial leadership.
Worried About 2022? You Have Time. I Can Help.
I’m betting that if you made it this far, your 2021 tax bill was a huge surprise (both huge and surprising). Let’s move past that.
If you want to maximize your tax returns and achieve overall financial stability, or if you’re curious about what corrections or general practices you can adopt to improve your business’s current tax position, don’t hesitate to contact me.
Talk soon,
Jeremy A. Johnson, CPA