Category Archives for "Taxes"

What You Need to Do NOW to Prepare for Tax Season

While income tax filings have an annual deadline, the management of your taxes is ongoing, especially as business owners. 

The key to managing your tax taxes is Proactive Tax Planning. This can mean many things to business owners, depending on the size and complexity of your business. But for the sake of keeping things simple and pragmatic, we’ll refer to proactive tax planning as a periodic review of your financials and projected tax liability DURING the tax year. This allows you to forecast your potential tax liability and position yourself to maximize any credits or deductions you may qualify for. This is the best way to make sure you’re paying the least amount in tax that you’re legally obligated to pay. But what does this look like in practice?

What you SHOULD have been doing (from January to September)

It is currently the beginning of the 4th quarter in 2021 (early October). If you were actively managing your taxes throughout the year (with the help of a tax pro, of course), you will have done these things:

  • Know your tax liability for the previous year—This number is the basis for what you may need to pay as quarterly estimated taxes. 
  • Pay your quarterly estimated taxes—If profitable, you should have been paying quarterly estimated taxes.
  • Review your financials on a monthly basis—You should know if you are more or less profitable as you were this time last year. This will give you a strong clue if you should increase or decrease your quarterly estimated tax payments. 
  • Review your financials on a quarterly basis with your tax pro/advisor—They will help forecast your tax liability, identify any tax savings opportunities, and help you make your estimated tax payments. 
  • A-la-carte consultations—Between quarterly consultations, you should have reached out to your tax pro before making any major decisions that will have a large tax consequence, like real estate or large asset purchases.

What you should do for the rest of the year (from October to December)

One of the biggest benefits that we have as business owners is the ability to control how much our businesses are taxed. How? By controlling how profitable we are. But we can only exercise that power by having up-to-date financials (a profit and loss statement and balance sheet). 

You can’t know what your tax liability will be until you close out your books after December 31. This is why they call it ESTIMATED taxes. However, by having accurate financial statements, we can make very accurate projections of what you may owe. And by knowing how profitable you are as we near the end of the year, you have the ability to increase or decrease business spending, which ultimately gives you great control over what you’ll be taxed on. 

There’s one popular, yet horrible strategy that I want to warn you against. There are accountants and “advisors” who will encourage business owners to sped off all of their profit in order to save on taxes. This is equivalent to spending $10 to save $3. It’s not illegal, but it’s just a bad strategy if you’re looking to build wealth. Instead, you want to focus on increasing PROFIT while budgeting for and minimizing your tax liability.

So, here are the things you’ll want to do for the remainder of the year:
  • Have all of your financial statements cleaned up and updated ASAP if you haven’t done this already. You cannot plan for taxes effectively without accurate financial statements.
  • Compare January through September 2021 to January through September 2020. Are you more or less profitable than the year before? This will give you a large clue if you should anticipate a larger or small tax bill.
  • Consult a tax pro. Have them do tax projections and forecasts based on your year-to-date Profit and Loss Statement, and based on what you think your net profit will be at the end of the year. Have them identify any potential tax savings opportunities.
  • Pay your quarterly estimated taxes if you haven’t done so yet. It’s important to pay 2021’s taxes with 2021’s dollars.  
  • Plan to meet with your tax pro before the year ends and keep a really close eye on your net profit as you approach December 31. 
  • Catch up on your quarterly estimated taxes if you haven’t done so yet or start planning for it. You should have very accurate estimates if you consulted a good tax pro. If not, use last year’s tax liability as your basis. 

Profit First has a wonderful system to help keep sufficient tax reserves. It’s simple, painless, and can help make sure you have enough for taxes, no matter how little or how much you make. Sign up now for an assessment and let’s get you started!

Having A Plan For That “Extra” Money in Your Profit First Accounts

When a client tells me they’re finding “extra” money in their Profit First accounts, I get excited for them, but also a little concerned.

Excited because more money in their accounts usually means their revenue has increased. Business is probably going well.

Concerned because—well, remember when we explained Parkinson’s Law? The demand for something expands to match its supply. It’s a phenomenon of human behavior that proves itself time and time again. As it applies to money, here’s what happens: The more money you have, the more money you will spend. 

So, for example, when you have “extra” money in your OPEX account after you pay the bills, your natural tendency is to think that’s money that can—or even should—be spent. You may drum up reasons for ongoing expense spending without thinking through if it’s feasible in the long term.

You’ll spend it, and then you’ll form habits of spending. 

Money Without a Plan

When you accumulate more funds than you’d anticipated having thus far in your Profit First accounts, please don’t think of that money as disposable cash. It’s really just Money Without a Plan, which is a bad thing. You should always have a plan for what to do when your revenue shifts. 

The beauty of Profit First is that you can build and tweak your plans through your allocation percentages. You already know you should review them on a quarterly basis, which is fine for the most part, but sometimes revenue has grown so much that you need to make an intermediate adjustment. Here’s what to do whenever your business has more money in its accounts than you planned for. (It might be time to make some new plans.)

Got extra money in the OPEX account?

The most dangerous place to have extra money is in OPEX. There are many options and ways to spend money on things that fall under operating expenses—it can be tempting. 

But remember that Profit First is based on circumventing Parkinson’s Law. Your OPEX allocation should be set up to just cover your current operating expenses so there’s no extra money hanging out in there. 

You can give yourself a little buffer though. What’s the minimum OPEX balance for your comfort level? It might be $100 or $500 or $1000, or one month of expenses. Consider that figure your “zero.” At the end of the month when all the bills are paid, if you have substantially more than your zero in OPEX, then you need a plan for that “extra” money.

What would best serve your business? It might be time to adjust your Profit First allocations to reduce the percentage going into OPEX and to drive them closer to your target percentages for the Owner’s Pay or Tax accounts. 

Or, maybe it’s time to create an advanced account or two within your system. Reallocate some OPEX funds into its own separate bucket for an Annual Expense account, or a Marketing account… It all depends on your business needs. 

Extra money in OPEX almost always means that overall revenue has increased. But it can also mean you’ve cut your operating expenses. Usually that’s part of a plan too, so your allocations should be adjusted accordingly. 

Got extra money in the Tax account?

Let this money accumulate until you’ve paid the taxes for the current period. Repeat: don’t do anything with this money until you’ve paid your taxes! 

Once that’s done, you can transfer the extra funds to your Profit account and withdraw them as a profit distribution when the time comes. Or you could add the funds to an advanced account you’re working to build up.

If you’re finding extra money in the Tax account even though your revenue hasn’t substantially increased (or nothing else has dramatically changed), this could indicate that you may have been a little off in calculating your Profit First targets the last go around. The percentage allocated for taxes should result in the right amount of reserves you’ll actually need, because it’s based on your total revenue. 

If it’s not making sense to you, seek the guidance of your Profit First coach or tax professional before adjusting your target allocations. 

Got extra money in Owner’s Pay?

Good. This is one time when you need a little “extra” in there, or else freaking out may ensue. The pandemic has taught us that it’s so important to still be able to pay yourself when revenue dries up in turbulent times. 

As with OPEX, you can decide on a comfort buffer. For some owners, it’s one month’s pay. But we recommend saving a cushion of three months. It really depends on your personal financial needs. Talk to your Profit First coach for guidance on the buffer and how long to keep it in your account—it’ll be different for every owner based on your overall financial health. 

If you’ve accumulated more than three months in Owner’s Pay, think about increasing your monthly pay disbursement, or adjust your allocations to put more money in Profit and use it to work toward building a rainy day fund or retirement plan. Realize that anything in Profit is still owner’s pay, but sometimes it’s how you label the funds that can determine how wisely you spend them.

Got extra money in the Profit account?

No one has ever complained that having extra money in their Profit account was a problem—go figure. But let’s say you’ve taken your regular profit distributions, you’ve paid off all your debt, you’re jetlagged from enough vacations… and you’ve still got extra profit that you don’t know what to do with. This is the moment to put your profits to work for you, by venturing into investments and retirement planning, if you haven’t already.

However, this is assuming you’ve already got three to six months of revenue sitting in a VAULT account. This is the ultimate disaster preparedness plan for your business, and if you’ve got more Profit than you know what to do with, then you’re surely in good enough shape to be amassing a VAULT.

Now that you have some ideas about what to do with that “extra” money, we’re feeling relieved.

Don’t hesitate to ask us for help in designing a plan at any stage of your business journey. This is exactly what we do.

How to Project Taxes Accurately

Projecting your tax liability can be very tricky.

First, the tax law is constantly changing, which can cause your tax liability to change, even if all other factors remain the same.

Also, the final tax bill that business owners receive often includes income from sources outside of the business, as well as deductions, credits, and penalties outside of the business.

And to complicate it further, let’s just say there’s a reason the IRS calls them “quarterly ESTIMATED taxes.” You can’t know your tax liability until you close your books at year’s end.

So how do we estimate, or project, how much a business’s taxes will be?

Proactive Tax Planning

The best and most accurate way to project your tax liability is to have tax planning sessions throughout the year with a tax professional.

Tax pros keep up with the constant tax law changes and can include business and non-business factors to provide very (but not completely) accurate projections throughout the year. A tax pro can also proactively look for tax savings opportunities to make sure you’re keeping your taxes as low as possible.

The IRS Method

First, the IRS doesn’t project your tax liability; it suggests you pay your estimated taxes for the present year, based on the tax liability of the previous year. So, if last year’s tax liability was $4000, the IRS wants you to pay $1000 in quarterly installments throughout the year.

This method (for paying estimated taxes) is better than nothing, but if you have a drastic increase in income, you could still end up with a very high tax bill using this method alone.

Profit First Method

The Profit First cash flow management system doesn’t project your tax liability either (which is very complex). But what it does really well is to make sure that you always have enough in reserves for whatever tax bills come your way.

The Profit First system works off of percentages, so you’ll have a lot of money in reserves if you did well, and not so much if you had a bad year. Either way, you’ll have enough in reserves based on the performance of your business. And you don’t have to be a tax nerd to get it right.

At Fit For Profit, we can help you with implementing Profit First into your business so you can feel secure that you’ll have enough saved for taxes. Fill out this form and book a call to get started.

The Art of Doing Taxes Without a Bookkeeper

Most people’s least favorite time of the year is coming. No, not Valentine’s Day. Tax Day.

As a business owner, you have the responsibility (and privilege) of filing your taxes with the federal government and at the state level. Tax time has a really bad reputation because it takes time away from business and life.

But we’d like to encourage you to shift your thinking around taxes. Paying taxes means that you’ve earned profit in your business. And while it might be painful to let go of those precious dollars, with Profit First you could be incredibly prepared.

When money is tight, it’s common to want to hold onto it and avoid paying for help in your business. But having help with bookkeeping and taxes is actually one of the best financial decisions you can make (and we’re not just saying that because that’s what we do).

Let’s take a look at what doing your taxes looks like without a bookkeeper:

  • Reconcile your books. If you haven’t been doing this monthly, you’ll have a whole year of transactions to take care of.
  • Review any unpaid invoices in accounts receivable and get aggressive about collecting them. Having revenue from last year carry into the new year isn’t ideal.
  • Ensure you have your employees’ and vendors’ correct addresses and prep both W-2s and 1099s for them, before the end of January.
  • Prepare a fixed assets register, calculate depreciation and make book adjustments as needed.
  • Perform account analysis on all other balance sheet accounts to make sure all balances are correct and current.
  • Match all transactions with their corresponding documents–receipts, bills, packing slips, etc.–to make sure you have the paper trail you need.
  • Download bank statements and store in a safe place.
  • Download payroll reports and store them in a safe place.
  • THEN get to work on your tax documents!

This is a truly abbreviated version of our 31-point checklist for the end of the year. So much more goes into ensuring your books are up-to-date and that you’re following the letter of the (tax) law.

Download the 31-point checklist here!

On the plus side, tax time is a breeze with a bookkeeper on your side. Not only does a good bookkeeper take care of most of the above for you, they’ll also work with your accountant so you’re not the one in the middle. There shouldn’t be any hunting for documents and forms because your bookkeeper makes sure they’re already accounted for.

And even better is that a good bookkeeper will walk you through how to painlessly have the tax funds you need come tax time. So there’s no putting off your IRS bill–because that’s never a good idea.

3 Down, 1 To Go

It's hard to believe that we are almost 3/4 of the way through 2019. In the US you just sent your quarterly tax payment in (it was due Sept. 16).

Or did you?

Take it from me, you DO NOT want to owe taxes to the IRS. I have been there, and it's the worst. Talk about sick to your stomach. 

It's crucial you are proactive regarding your tax situation. Here's what you need to do going into Q4. 

1) Check in with your accountant and/or tax preparer today and have them report to you on your tax position for the year so far. If you have grown this year it is very likely you will owe more tax than you have been sending in quarterly. Starting to prepare for that NOW will save on your antacid bill on April 15th. 

2) If you haven't already, separate the taxes you will owe from your operating account. It's too tempting to "borrow" money from your main account and then never put it back. The minimum you should be putting away is enough to cover quarterly payments. Take it out of your Operating Account and leave it alone until you have to write that wonderful check to the tax man. You'll be glad you did.

Those two simple steps will help make sure you don't dread the next tax deadline, by being prepared and having managed your cash well.

Now go do it!

How Taxing was Tax Season For You?

One of the most stressful times of the year for many business owners is "tax season" - that frustrating period of time between about the end of January and middle of April, when your accountant or tax preparer is performing some kind of alchemy on all the receipts, documents and records you sent them from the past year, coming up with your tax bill for the year.

And You?

You spend that period of time hoping and praying (and maybe doing a lot of sweating) that you don't owe a bunch. Because you don't have any extra cash just lying around waiting to send to the government.

I've been there. 

And it's not always about just sticking your head in the sand and hoping that taxes just get abolished so you don't have to pay them. One of the big mysteries surrounding taxes for me was how to know if I was putting away enough as our business scaled. We grew really fast over the period of three or four years, and the privilege of earning more is you get to "contribute" more to the tax man.

And while you aren't going to get out of paying your taxes, April 15th (or 30th my Canadian friends) doesn't have to turn you into a stress monster every year. 

Implementing the Profit First Cash Management System in your business will ensure that will not be left scrambling at the end of the year coming up with money you don't have to pay a tax bill you don't really want to, but have to. You can delay paying your vendors, or yourself, but the tax man is GOING to get his. 

NOW is the time to get your tax situation settled for next year, and once and for all. 

Contact me today and let's get working on getting your taxes taken care of for next year, as well as creating your permanently profitable business.

Let's Do This!

Dean

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