Is my tax strategy really as good as it can be? Most business owners (and anyone paying high taxes) have thought this at one time or another. After seeing dozens of TikTokers brag about saving hundreds of thousands with “simple tax tricks” and “this one tax loophole,” it’s difficult to NOT wonder if maybe you’re missing out on some tax savings opportunities.
Well, first off, there’s a reason why it’s best not to trust everything you see online: Anyone can tell you anything and never have to worry about showing you proof it’s true. But all of that aside (stuffs rant into shirt pocket for another article), there are some legitimate ways to evaluate your tax strategy to see if you’re missing out on tax credits and deductions, either in your personal or business taxes.
Red Flag#1: You’re Consistently Surprised by Large Tax Bills
Your tax bill should never be a surprise. So if you’re shocked each year at the amount of your tax bill, it’s time to look for a tax professional (or a better one). Ideally, a good tax professional will meet with you throughout the year to perform tax projections. This is a kind of forecasting that estimates the tax bill you can expect in the upcoming tax season. Based on the results, your tax professional or CPA should either help you lower your tax bill through tax incentives or help you plan how you’ll pay your estimated tax bill without draining your cash flow.
Of course, if you’ve had any significant tax events in your life or business, your tax professional should be adjusting your tax projections accordingly. That way, your tax plan always matches your actual tax position.
Without this kind of proactive tax planning, you’re essentially flying blind and leaving yourself vulnerable to a range of financial problems due to this spike in your cash flow demands each year.
- Diverting Funds from Operations: An unexpected tax bill can force you to pull funds from essential areas like payroll, inventory, or supplier payments. This disruption may slow down your operations or force you to delay key business activities, ultimately affecting productivity and profitability.
- Restricted Growth and Investment: When tax bills eat up available capital, opportunities for growth and investment are often put on hold. Expansion plans, new hires, and equipment upgrades may be delayed or abandoned, limiting your ability to scale and compete effectively in the market.
- Increased Debt: If cash reserves are insufficient, businesses often turn to loans to cover tax bills. This adds interest payments on top of your existing financial obligations, further tightening cash flow. Borrowing to pay taxes not only incurs debt but also diverts resources away from future investments.
- Penalties and Fees: Failure to plan properly can result in late payments or underpayment of taxes, leading to penalties and interest. These extra costs drain resources and worsen your financial position, especially if they become a recurring issue.
- Eroded Financial Buffer: Without proper tax planning, tax payments can drain your cash reserves, leaving your business with little to no financial cushion. This can be particularly risky during downturns or unforeseen expenses when having a buffer is crucial for business continuity.
Proactive tax planning allows you to anticipate tax bills and ensure they don’t disrupt your business’s cash flow. It also gives you the chance to make strategic financial decisions based on your tax obligations, rather than reacting to them after the fact.
Businesses that work with their CPAs throughout the year to adjust their tax strategy as revenue changes, new expenses arise, or major financial decisions are made can avoid the pitfalls of last-minute scrambling.
Proactive tax planning gives you the ability to make informed decisions, such as when to purchase new equipment, how to handle employee bonuses, or how to take advantage of tax deferral strategies.
For instance, if your business experiences seasonal revenue spikes or has major expenses on the horizon, adjusting your tax estimates and financial strategy mid-year can help minimize the impact of those fluctuations.
Sign #2: You’re Missing Out on Tax Deductions and Credits
If you’re constantly hearing from people other than your CPA about the tax credits and deductions that may be available to you, it’s time to rethink your tax strategy (and choice of tax professional).
One of the most significant benefits of a well-planned tax strategy is the ability to maximize deductions and credits. If you’re consistently overlooking these opportunities, it’s a sign that your tax professional is failing your business by providing a poor or subpar tax plan. Ultimately, a bad tax plan means you’re leaving money on the table.
For example, deductions for business expenses like equipment purchases, office supplies, employee benefits, and even vehicle use can add up quickly. Credits for research and development activities, energy efficiency, and hiring in certain zones or categories, are also commonly overlooked but apply to many businesses.
Not knowing about these tax-saving opportunities means you’re likely paying more in taxes than necessary.
A good CPA will actively identify tax-saving opportunities for your business. They’ll ensure your bookkeeping is in order, that you’re tracking deductible expenses throughout the year, and that you’re taking full advantage of every tax credit and deduction available to you.
Sign #3: You’re Always Getting IRS Notices
A mailbox filled with IRS letters is a strong indicator that something is off in your tax strategy. While receiving a notice doesn’t always mean you’ve done something wrong, recurring issues with the IRS can signal poor tax reporting, errors in filing, or a lack of compliance with tax regulations—all signs of a bad tax strategy.
Some of the most common triggers for IRS audits include:
- Discrepancies between reported income and tax filings
- Excessive deductions or credits that don’t align with normal ranges for your industry or business type
- Incomplete or inconsistent documentation for tax credits, tax deductions, or tax return information
This is why good bookkeeping is so important: When your business is audited, you’re able to substantiate tax incentives claimed, as well as each field on your tax return.
But if your tax strategy fails to ensure accuracy and proper record-keeping, your business may become a target for frequent audits. If errors are found during an audit, your business could face penalties, interest, and even back taxes. The financial burden from these penalties can be significant, especially if you’re a smaller business that already operates on tight margins.
Sign #4: Your Business Structure Hasn’t Been Reviewed in Years
Many businesses continue operating under their original structure, such as a sole proprietorship, partnership, or LLC, without considering whether it’s still the most tax-efficient option as their business grows and evolves. If your business structure hasn’t been reviewed or adjusted in several years, you might be missing out on opportunities to optimize your taxes.
Your business structure determines:
- How your income is taxed
- What deductions are available
- How much personal liability you carry
For example, a sole proprietorship may work for a small business in its early stages, but as the business grows, switching to an S Corporation or a C Corporation could offer significant tax advantages, such as reduced self-employment taxes or the ability to retain profits at lower tax rates.
An outdated business structure can cause you to overpay on taxes, limit your ability to take advantage of tax breaks, and even expose you to more financial risk.
For example, LLCs and partnerships may have tax benefits in their flexibility, but an S Corporation could allow you to save on payroll taxes. On the other hand, if you’re structured as a C Corporation and aren’t taking full advantage of the lower tax rates and fringe benefits, you may be paying more than necessary.
As your business grows, tax laws and regulations change, and your revenue stream becomes more complex, regularly reviewing your business structure can result in substantial savings.
Ultimately, it’s in your best interest to review your current business structure with a solid CPA. Whether you convert to a more tax-efficient entity or simply adjust your approach to compensation and dividends, a well-timed adjustment or restructuring could result in significant tax savings for you.
Sign #5: You’re Not Taking Advantage of Tax Deferral or Timing Strategies
Good tax planning is about more than what you owe: It’s also about when you pay what you owe. If your tax strategy doesn’t consider timing and deferral strategies, you may be paying more than you need to or at a time when it’s less advantageous for your business’s cash flow.
Tax deferral strategies allow you to minimize your immediate tax burden while optimizing your financial resources.
For example, you may be able to delay income to a future tax year or accelerate deductible expenses in the current year to reduce your immediate tax liability. These techniques are particularly helpful for businesses that experience fluctuating cash flows or seasonal revenue spikes.
But if you’re not using tax deferral strategies, you may be unnecessarily paying taxes when your business can least afford it.
For example, if your business has had a particularly profitable year, failing to defer income or accelerate expenses could result in a large tax bill that might have been mitigated through better planning.
On the personal side, if you’re approaching the end of the year and expect to be in a higher tax bracket, deferring income until the next year can help lower your current year’s tax liability. Similarly, accelerating expenses, such as purchasing equipment or prepaying for services, allows you to claim those deductions in the current tax year.
Missing opportunities to time capital purchases or other investments could mean you also miss out on depreciation deductions or other tax benefits that are dependent on when expenses are incurred.
By not employing timing strategies, your business may experience cash flow shortfalls or miss out on potential reinvestment opportunities because of poorly timed tax payments.
If your current tax strategy doesn’t include income deferral or expense timing, you’re likely missing out on opportunities to reduce your tax burden. A good CPA like those at MBS Accountancy can help you build a strategy that takes advantage of these techniques, helping to optimize your tax payments and keep more cash in your business when you need it most.
Sign #6: You’re Unaware of State and Local Tax (SALT) Obligations
While many business owners focus on their federal tax obligations, you can’t neglect your state and local tax obligations. This becomes even more critical if your business operates in multiple states, or even in different cities or counties. Failing to account for varying tax laws can lead to costly penalties that could otherwise be avoided.
If your business has expanded operations into new states, or if you sell products or services across state lines, you need to ensure that you’re meeting the tax requirements of every applicable jurisdiction. Failing to do so can result in tax liabilities that accumulate over time, potentially leading to audits or penalties.
For example, some states require businesses to collect sales tax on digital goods, while others do not. Similarly, state income tax rates vary widely, and certain states may offer credits or deductions for specific business activities. If you’re unaware of these rules, you could be paying more than necessary in taxes or unintentionally violating state tax laws. You might miss out on state-specific deductions, credits, or incentives that could significantly reduce your tax liability.
A good CPA can help you stay on top of your state and local tax obligations, as well as advise you on where you have a “nexus” (a legal presence in a state that triggers tax obligations). This is crucial to ensuring that you’re only paying what’s required and avoiding any unnecessary tax exposure.
Take Control of Your Tax Strategy Before It Costs You More
A bad tax strategy doesn’t just cost you money in the form of missed deductions or surprise tax bills—it can also hinder your business’s growth, cash flow, and overall financial health.
The good news is that these issues can be corrected with a proactive, well-informed tax strategy. By working with an experienced CPA, you can ensure that your business structure is optimized, your deductions and credits are fully utilized, and your state and local tax obligations are met.
If you know your tax strategy needs help, contact MBS Accountancy! Our CPAs and tax accountants offer strategic tax planning, tax preparation, and tax filing for business owners and their business entities. By partnering with our expert CPAs, you can turn a bad tax strategy into one that saves you money and helps your business thrive and succeed.