Small business tax planning is the practice of making decisions throughout the year that legally reduce the tax a business owes and prevent surprises at filing time. It works best as a calendar of small, regular steps. Accurate books kept current every month are what make each step possible.
Why does tax planning have to happen during the year?
Most choices that affect a tax bill must be made before December 31. Once the year closes, your tax preparer can only report what already happened. Planning during the year gives you time to adjust estimated payments, time purchases, and fund retirement accounts.
A tax planning calendar for small businesses
| When | What to do |
|---|---|
| Every month | Reconcile accounts and review the Profit and Loss statement so taxable income is known |
| January | Send Forms W-2 and 1099 and pay the fourth quarter estimated tax by January 15 |
| March and April | File the business and personal returns or extensions, and pay the first quarter estimate by April 15 |
| June | Pay the second quarter estimate by June 15 and review year-to-date profit with your CPA |
| September | Pay the third quarter estimate by September 15 and project full-year income |
| October to December | Decide on equipment purchases, retirement contributions, and the timing of income and expenses |
Which areas should a small business review with its CPA?
- Entity type. Whether the business is taxed as a sole proprietorship, partnership, S corporation, or C corporation changes how profit and owner pay are taxed.
- Estimated payments. Paying enough each quarter avoids underpayment penalties.
- Owner compensation. Salary, distributions, and benefits are taxed differently.
- Retirement plans. Contributions to a qualified plan can reduce taxable income.
- Equipment and vehicles. The timing of a purchase affects when the deduction is taken.
- Home office, mileage, and meals. These require records kept during the year.
- State and local taxes. Sales tax, payroll taxes, and business license fees vary by location.
What records does tax planning depend on?
- Books reconciled through the most recent month
- Receipts and invoices attached to transactions
- A mileage log, if vehicles are used for business
- Payroll reports by quarter
- A fixed asset list showing what was bought and when
What are the most common tax planning mistakes?
- Waiting until tax season to look at the numbers
- Mixing personal and business spending in one account
- Missing estimated payments in a profitable year
- Buying equipment only for the deduction when the business does not need it
- Leaving the books unreconciled, which hides the true profit
Common questions
Tax planning should run all year. The most useful review points are mid-year and early in the fourth quarter, when there is still time to act before December 31.
For most taxpayers, federal estimated payments are due April 15, June 15, September 15, and January 15 of the following year. A due date that falls on a weekend or holiday moves to the next business day.
A bookkeeper keeps the records accurate and current. Your CPA or tax preparer advises on tax strategy and files the return. Planning works when the two share information during the year.
Clean books capture every deductible expense, show profit early enough to plan, and reduce the time your tax preparer spends on corrections.
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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