How a Little Tax Planning Can Go a Long Way
Small businesses have experienced quite the roller coasters the past few years. As if small and mid-size businesses didn’t have enough on their plate, the world nearly came to a standstill, people were told to stay home, the economy stagnated, and uncertainty permeated over everything. Some outlooks, however, paint an optimistic view for small businesses in 2022 and beyond. We view the economic outlook based on some expert analysis and how tax planning can help your business out.
The Economic Outlook on the Horizon
It’s no secret that the state of the world has economic effects. What happens domestically and even internationally manifests, affecting the ebbs and flows of the economy. In addition to that, policy changes create a lasting impact as well. The unemployment rates, supply chains, investor confidence, and access to materials all play a role in how confident people feel about starting their own business or continuing to invest in a current business venture.
So what are some of the main concerns for this year and how can tax planning help you better prepare? As we begin a new tax year, it’s important to look back and reflect on expenses and how better tax strategies can benefit us moving forward.
The Great Resignation & Shifting of Labor Patterns
According to some experts, the Great Resignation could lead to a small business revolution. Intuit’s New Business Insights report predicted that 17 million new small businesses will be formed in 2022. So while many businesses had to close their doors during the pandemic, people surveyed by Intuit stated that Covid has also accelerated their plans to start their own business.
For businesses that were already around in 2020, things have slowly begun to normalize. As the pandemic swept through the country, small businesses were forced to adapt to remain above water. For many of those businesses, those adaptations—particularly a change to digital—proved to be beneficial and are here to stay. According to Intuit, 75% had to make significant changes to their business due to the pandemic and 25% changed their entire business model.
Inflation and Gearing Up for Possible Losses
A growing number of small businesses and corporations are now passing on the increasing costs of materials to customers and consumers. The supply chain issues and material shortages of 2021 continue to reverberate in the economy. According to a recent survey, 47% of businesses are passing on costs to customers and 32% say they will have to raise prices soon. All of this seems to indicate that inflation is here to stay.
Some of the issues small business owners face due to these high prices include:
- Trouble with suppliers, as smaller buyers are often snubbed for larger buyers
- Shortage of materials and supplies, which means an increase in price
- Continuing supply chain issues at various levels
- Returning to pre-pandemic levels
- Difficulty in balancing the need to raise prices without losing customers
The Federal Reserve has a big hand in determining how the economy bounces back and what economic recovery looks like. The way the Federal Reserve controls monetary policy and sets interest rates impacts all sectors of the economy.
The Fed’s role impacts the economy in three substantial ways: It sets the discount rate that banks use to borrow from regional Federal Reserve Banks, it buys and sells U.S. Treasury bonds, which influence interest rates, and the reserve requirement for banks.
Tax Strategies to Implement Early on in the Tax Year
So whether you are a new business or one who has recently done some internal overhauling, here are some of the main tax strategies and tax planning tips to consider as the year kicks in.
Pay Close Attention to Your Adjusted Gross Income
The Adjusted Gross Income (AGI) directly relates to how many taxes you end up paying. There are several ways to adjust your AGI to avoid paying a higher percentage in taxes. This includes contributing to a tax-deferred retirement plan, itemizing deductions, and contributing to a health savings plan.
Strategize Your Spending
You can reduce your taxable income by being strategic with your spending and tax elections. For example, if your business requires expensive equipment, but whether you spend this or not depends on where you are with profits.
Establish Benefit Plans for Employees
By offering employee compensation, you can lower the employment tax costs. Some of these options include medical and dental insurance, long-term insurance, disability, insurance, tuition reimbursement, transportation, etc.
Pay down your debt
Loan interest can be tax-deductible in most cases. If you have a business loan and have some cash in hand, consider implementing a strategy to pay that down as soon as possible.
Talk to your accountant and plan for short-term and long-term strategies
This is an important part of running a business. Running away from taxes or scrambling at the end of the year is not a good strategy. Talking through a plan and implementing it early can go a long way.
These are just some tax strategies that help small businesses make the right decisions. A CPA can help you with individualized advice and guidance based on your industry, sector, employees, tax structure, etc.
Plan, Strategize, & Grow — Smart Tax Planning Can Help You Get Over the Hump
Business owners are optimistic people. They are resilient, relentless, and completely dedicated to their work. Taxes are a financial and administrative burden that slap a lot of business owners in the face, especially in difficult times. How can you set yourself up for success? It’s simple. Plan ahead.
Want to implement a strategy that works? Call Rishi Shah today!