How to Save Big Money on Your 2020 Taxes—Part 2

How to Save Big Money on Your 2020 Taxes—Part 2

Taxes are a thorn in just about every entrepreneur’s side. Indeed, taxes are your single biggest business expense. That said, it’s fairly easy to reduce the amount of sting taxes cause—but you do have to be proactive.

And we’re not talking about doing anything illegal. We’re not suggesting you evade paying taxes; that’s a recipe for disaster. We’re suggesting you do what every highly successful business owner should do and implement creative strategies to reduce your tax liability to the lowest levels you can, while keeping more money in your wallet to grow your business.

Last week in part one, we discussed how you can lay the groundwork for your yearly tax strategy by establishing the proper relationship with a qualified bookkeeper and a tax advisor. Here, we’ll discuss how you can use this foundation to develop and implement creative tax strategies that can save your company big money.

 

Create your tax projections
Once you’ve got your financial team in place, you should meet monthly with your bookkeeper—within the first 10 days of the month—to review your profit and loss statement (P&L). You should review the categorization of your income and expenses each month, rather than scrambling to get your receipts to your CPA in February or March just before taxes are due. Your bookkeeper should have your books reconciled, including all bank accounts and credit card expenses, prior to this meeting.

To be most effective, your bookkeeper needs to understand all of the ways you earn revenue and know the expenses required to fulfill on your product and/or service. Using this knowledge, your bookkeeper should update a daily forecast each week, and produce your monthly P&L, so you can stay regularly apprised of your company’s financial health and make strategic decisions on that basis.

Each month, when you review your P&L, you’re looking for variances from the prior month as well as expenses that are improperly categorized or not categorized at all. It’s crucial to properly categorize all expenses, so you can measure trends and write off as many deductions as possible against your taxable income.

In late October, your bookkeeper should send a year-to-date profit and loss (P&L) statement to your tax advisor, along with projections of income and expenses for the remainder of the year. Your tax advisor will then use that data to create tax projections based on your current earnings versus expenses and how much you expect to bring in over the remainder of the year.

Using these projections, you can put strategies in place to minimize your tax liability. Most of these strategies need to be in place BEFORE the end of the year, so make sure you’ve started this process by the final weeks of November at the very latest.

If your tax projections indicate that you’re going to owe money, contact us, as your Family Business Lawyer™, and ask for our list of year-end tax strategies. And if you haven’t run your tax projections yet because you don’t have a qualified bookkeeper or tax advisor, we can refer you to the professionals we trust most.

 

Strategize for maximum savings
Once you have your tax projections ready, you want to look at whether you’re likely to be in a higher tax bracket this year compared with future years. Determining this will allow you to save on your taxes by managing when you receive your year-end income and pay your year-end expenses.

After reviewing that data, if you’re likely to be in a higher tax bracket this year than in the future, it makes sense to push taxes off into the year(s) when your tax rate will be lower. Even if your tax bracket will be higher in future years, it still might be worthwhile to push your taxes off to the future. This way, you’ll be able to use those funds, which would otherwise be in the hands of the government.

This is the question to ask yourself: Can I make more money with those funds now than I’d pay in higher taxes by pushing those tax payments off until later?

If you can make more money now, you can decrease this year’s taxes by pushing income into the future and accelerating expenses that you’d otherwise pay next year into this year, or even use additional available cash to fund tax-deferred retirement plans.

If you’d prefer to pay taxes this year because you’re currently in a significantly lower tax bracket than likely in future years—or have losses that will be expiring to offset your income—you should increase this year’s income. You can generate more revenue now by offering year-end discounts on products and services that may not need to be delivered until next year.

 

Managing income and expenses is key
Managing when you receive income and pay expenses in this manner can save you big money on your taxes, not just this year but every year. However, this is just one facet of an effective tax-saving strategy. To learn about additional ways to save money on your 2020 taxes, contact us today.

 

This article is a service of Trust Counsel, Personal Family Lawyer®. We don’t just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That’s why we offer a Family Wealth Planning Session,™ during which you will get more financially organized than you’ve ever been before, and make all the best choices for the people you love. You can begin by calling our office today to schedule a Family Wealth Planning Session.

About Trust Counsel

We are Trust Counsel – Our name says it all. We are specialists.  We practice only the areas of family wealth succession:  Estate Planning, Asset Protection, Business Succession, and Probate. We know what we are doing. We love what we are doing. We believe in what we are doing.

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About Trust Counsel

We are Trust Counsel – Our name says it all. We are specialists.  We practice only the areas of family wealth succession:  Estate Planning, Asset Protection, Business Succession, and Probate. We know what we are doing. We love what we are doing. We believe in what we are doing.

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