A business is actively managing its tax strategy when the owner knows the expected tax bill before the year ends and has made deliberate choices to shape it. A business is reacting when the first look at the numbers comes at filing time. The difference is usually a few scheduled conversations and books that are current every month.
Five signs your tax strategy is reactive
- Your tax bill surprised you last year.
- You paid an underpayment penalty.
- You meet with your tax preparer once a year, after the year has ended.
- You do not know your year-to-date profit today.
- Your entity type has not been reviewed since the business was formed.
What does active tax management look like?
| Reactive | Active |
|---|---|
| Books caught up in March | Books reconciled every month |
| One meeting with the tax preparer each year | Reviews at mid-year and in the fourth quarter |
| Estimated payments guessed or skipped | Estimated payments based on actual year-to-date profit |
| Purchases made without thought to timing | Major purchases timed with advice |
| Tax bill learned at filing | Tax bill projected by October |
Questions to ask your CPA this quarter
- Based on my year-to-date profit, what will I owe for the year?
- Are my estimated payments on track?
- Is my entity type still the right one for my level of profit?
- Is my owner pay set correctly?
- Which retirement plan fits my business, and how much can I contribute?
- Should I make any planned purchases before or after year end?
- Are there credits my business may qualify for?
What does your CPA need from you?
Your CPA can only plan with current numbers. Send a Profit and Loss statement and Balance Sheet reconciled through the latest month, payroll reports, a list of equipment bought during the year, and any changes you expect, such as a new hire, a new location, or a loan.
How do bookkeeping and tax strategy fit together?
Bookkeeping produces the facts, and tax strategy uses them. When the books are a quarter behind, every projection is a guess. When they are current, a mid-year review takes an hour and leaves months to act. Our role is to keep the books ready and to work alongside your CPA, who gives the tax advice and files the return.
Common questions
Review it at least twice a year, at mid-year and early in the fourth quarter, and again whenever the business changes significantly.
Tax preparation reports what happened last year. Tax planning makes decisions during the year that change what will be reported.
In many cases a business can change how it is taxed. Whether it helps depends on profit, payroll, and the owner’s situation, so the decision belongs with your CPA.
Federal tax is due as income is earned during the year. If quarterly estimated payments were too low, a penalty can apply even when the full balance is paid with the return.
This article is general information. Tax rules change and depend on your situation, so confirm any tax decision with your CPA or tax preparer.
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