With the end of the year just around the corner, now is a great time to discuss tax planning with your clients. The right strategies can make a big difference in your clients' lives and their ability to reach their goals in the near future.
Here are some of the most important things to review with your clients when engaging in year-end tax planning.
Think long term, not just one year
Tax planning is all about the long game. Sure, you can use strategies that will save your clients money right now, but the goal of tax planning should be to provide long-term results. When working with clients, ask: what can we be doing to save taxes now and help the business months or years from now?
Thinking long term can also help you avoid making short-sighted decisions that may benefit the business now but hurt it later on down the road. For example, paying out large year-end bonuses may save taxes this year but could drain significant cash that you'll need down the road.
To find the best long-term strategies, sit down and talk to your client about their goals. Understanding what they want to achieve can help you develop a plan to reach them and maximize tax benefits at the same time. For example, if a business has moderate income this year but is expecting to have significantly higher profit next year that will bump them up into higher tax brackets, it may not make sense to pull extra expenses/deductions into this year.
Accelerate expenses and delay income
Increasing spending and delaying income can help clients reduce their taxable income for the year. However, it's essential to be strategic here. Start by reviewing the client's expenses.
- Which expenses can be accelerated?
- Were they planning on investing in new equipment or spending money early in the next year? If so, can these expenses be accelerated to the end of this year?
For example, can the client pay for their workers' compensation coverage upfront right now rather than paying monthly next year?
Increasing spending will tie up cash, but it can also help cash basis taxpayers save money on their taxes for the year. If they were planning these expenses anyway, it may make sense to bump them up to the end of this year rather than waiting. It's important to remember that, for these cash basis taxpayers, any expenses that clients accelerate will still count toward 2022, even if they don't receive the services until 2023. For example, a client may pay in 2022 for workers' compensation coverage in 2023. The client paid for the insurance in 2022, so it will be deductible for that year.
While expenses should generally be accelerated whenever possible, income should be delayed if possible. Lower income and higher expenses can help reduce your client's tax bill. Review all income sources and see which ones can be put off until after New Year's Day. Consider from a cash perspective whether it makes sense for your clients to allow their customers to make payments in early January rather than December for goods or services.
Adjusting your clients' spending and income can go a long way in reducing their taxes, but it's important to act quickly and get these on paper before the end of the year.
Review your client's entity structure
Different business entity structures have different tax benefits or drawbacks. Many small businesses are being reported on
Review your client's entity structure to determine whether they could save on taxes by moving to a different entity or electing a new tax entity such as an S corp. Some tax professionals will say it makes sense to switch entities based on an income threshold, but that's not always the case. I recommend always running the numbers and ensuring a change in entity does in fact make sense.
Maximize deductions
Maximizing deductions is an effective and simple way to reduce your client's tax bill. Review their financials to see where they can take advantage of deductions, such as:
- Business-related travel expenses;
- Office expenses;
- Insurance;
- Software subscriptions;
- Marketing expenses; and
- Charitable donations.
Deductions are a great way to reduce taxes now and in the future, so make them a part of your year-end planning with your clients. A lot of times, clients have been doing various things throughout the year that could count toward a deduction, but they haven't necessarily captured this information in their accounting software. What seems like common sense to us as accountants is not always common sense to our clients. Inquire about deductions and go through them with a fine-tooth comb.
Consider specialty tax credits
Some clients may also qualify for special tax credits that can further reduce their tax burden. For example, if your client is in real estate, can they use cost segregation to increase depreciation or a 1031 exchange to reduce capital gains taxes?
Many industries have specialty tax credits that your clients may be able to leverage. For example:
- Construction companies may qualify for energy credits;
- Restaurant owners may qualify for the
FICA tip credit ; and - Tech-related companies, manufacturers or engineering firms may qualify for research and development credits.
Not every client will qualify for a specialty tax credit, but it's an area that's worth exploring to maximize tax savings.
Year-end tax planning can save your clients money now and in the future. Make sure you're having this conversation with your client before the end of the year and taking proactive steps to help them achieve their goals. The sooner you have this conversation, the sooner you can get started developing plans and strategies to help them save on their taxes.
