How to Avoid Tax Planning Mistakes for Your Small Business

in Business

As a small business owner one of the critical areas you need to examine and plan for is tax. Making the right decisions, adopting an appropriate strategy and drawing up a suitable tax plan for your business can go a long way towards helping you to avoid errors and maximise your returns.

It is also essential when planning your tax return and preparing for the new financial year to evaluate the fixed costs associated with running your business. For instance, when it comes to crucial insurance, finding the right balance of cover and cost for the new financial year is important, checking out BizCover’s online comparison platform will provide this information and guidance.

The end of the tax year is looming, and you need to look at your taxable income for the current year and your projected taxable income for the next tax year. This should, of course, guide your planning strategy. COVID-19 makes planning tougher than usual as predicting how business and regional, national, and global economies will look is incredibly hard. However, there are things you should be aware of to avoid mistakes and steps you can take.

It is crucial that you are aware of how your business performed in the current tax year, where it is now, and what you think things will look like in the next tax year. Without that knowledge or awareness, planning and taking supporting action is impossible.

  • It can be a good idea to spend money in the current tax year rather than waiting. However, do not spend money just for the sake of spending or only to maximise any potential tax deductions. Ensure that what you buy is necessary and that any investments you make add value to your business.
  • Whether or not you decide to adopt accelerated expenditure as a strategy should be informed by the position of your business this last year and its projected one for the next year:

If the last year has been tough or disappointing and income has been low, but you anticipate that the next year’s profits will be better and may even move you into the next tax bracket, it could be a good idea to:

  • Defer large expenses until the next tax year. This will allow you to offset some income against necessary, operational expenses.
  • Send out invoices now for products or services that will only be delivered in the next tax year.
  • Pay accounts as they become due rather than in advance.
  • Purchase assets and equipment this tax year that feature in your business’s operational plan.

If this year has seen good income and you anticipate a drop in revenue next year, your approach will be different. In this position, some small business owners:

  • Prepay some costs such as insurance, professional subscriptions and memberships, leases, licenses, or even rent. These are legitimate deductions in the current tax year and will give you breathing space in the next year.
  • Where possible, write-off assets below the relevant threshold. A further option is to depreciate rather than to write-off assets.
  • Postpone some of your invoicing until the next tax year.
  • Identify and then write off any unrecoverable debts.
  • If this is your first year in business, you may be able to deduct certain start-up expenses such as registration fees and the costs of using legal or financial specialists for advice, contracts, etc.
  • If you have decided that increased expenditure is right for your business at this stage, make sure it is meaningful. Do not simply move money around; it must be spent on items and areas that will grow and enhance your business. The idea is not to empty you company’s bank account to improve the tax assessment situation. This is unlikely to result in many tax advantages and will leave you without a cushion of cash to help with losses or shortfalls in income.
  • Make sure that you have the information that you need and that it is correct. When it comes time to submit a return it will help a great deal if you can refer to up-to-date stock reports, accurate vehicle logbooks and correctly stored and invoiced.

At this extraordinary and challenging time for your and other businesses, you may also be able to benefit from various forms of pandemic-linked forms of assistance and relief. For instance, you may be granted additional time to lodge tax returns or to pay taxes and there may be the option to have any refunds you are owed fast-tracked.

Consult either government websites or financial or tax professionals for any advice or assistance that you may require. Getting your tax planning right is perhaps more important now than usual as the world continues to grapple with COVID-19 and its effects.

Image Credits: Kelly Sikkema

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