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One of the most important chores I do at my small business at the start of each year is tax planning. In fact, I do this even as I am preparing to make the year-end tax filings for the prior year. There are six reasons I think it makes sense for tax planning to be a small-business priority early each year.
Gain Valuable Tax Planning Information from Prior Year
The process of preparing for and making my small business's year-end tax filings provides valuable information about its taxes for the coming year. I find that it is much easier to utilize this information in my tax planning when it is fresh in my mind. If I wait until later in the year, the tax planning process may take much longer, since I may have to refer to the prior year's tax documents to refresh my memory on many pertinent issues.
Prepare for Meeting with Accountant
By doing my preliminary tax planning for the year before I meet with my accountant to finalize the prior year's taxes, I can use this meeting far more productively, and, possibly, even avoid the necessity of a second meeting. In particular, I can come to the meeting prepared with questions about my business's tax situation for the current year.
Save Time
I believe that doing my tax planning early in the year saves administrative time later, because I am better able to anticipate what records I will need to keep and to plan tax strategies, such as retirement plan contributions, that span the entire year.
Improve Cash Flow Projections
Early tax planning is important to effective cash flow planning for the year. Since many businesses fail because of inadequate cash, I consider projecting cash flow to be an essential exercise for any small business, and taxes generally are an unavoidable use of some of a business's cash. Therefore, by completing my tax planning early in the year, I am able to more accurately project my business's cash needs.
Make Better Investment Decisions
One aspect of my annual business planning is deciding on business investments for the coming 12 months. Since investment returns should take into account related tax savings, tax planning early in the year can provide information needed to make the best investment decisions.
Save Money
I also believe that the earlier I do my tax planning for the year, the more I may be able to save on taxes. For example, for a small business, deductible retirement plan contributions can reduce taxable income. However, it may be easier for a business to maximize these tax savings if they are anticipated through tax planning early in the year.
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