Now Is Your Last Chance To Save On Your 2021 Taxes

Prepare Your Foundation

To save on your 2021 taxes, your first step should be either building or rekindling your relationship with your team of financial professionals. These are the individuals who will support you in establishing the foundation for developing and implementing your tax-saving strategies. At the very least, this team should include a Family Business Lawyer™, a bookkeeper/financial manager, and a tax advisor, which should be either a Certified Public Accountant (CPA) or an Enrolled Agent (EA).

If your bookkeeper’s job is more about data entry than financial management, you should look for someone new—or quickly get your current team member trained and up to speed. An effective bookkeeper will be managing your books on a week-to-week basis (if not daily, depending on your business). Note I said “week-to-week,” not just “month-to-month” or “quarter-to-quarter.”

Your bookkeeper’s primary responsibilities should include daily/weekly cash-flow management, monthly review of reports and categorization of expenses, and quarterly updates of your forecast and projections. Again, if your bookkeeper isn’t providing these types of services for you, your business is missing an essential part of its financial foundation. 

Outside of your bookkeeper, your tax advisor is the person who actually files your taxes. Ideally, you should meet with your tax advisor at least twice a year: once in May/June (after tax season) and once approaching the year’s end in October/November. Obviously, it’s already quite late in the year to start your year-end tax planning, but you still have time if you act immediately.

The May/June meeting is a general catch-up, mid-year review that lets your tax advisor know what you’re financially on track to do for the year. Based on that information, your advisor can consider the most effective tax strategies for the coming year.

When you meet again in October/November, that’s when you’ll really get down to business. This is when you’ll project cash flow through the end of the year and get a tax estimate using a couple of different assumptions, both with and without tax-saving strategies included.

If your tax advisor cannot provide this level of service and is merely a tax filer, it’s time to get a new advisor. As your Family Business Lawyer™, we can help you find a tax professional that offers these kinds of services, so contact us today if you need to find a creative tax advisor who’s capable of handling such matters.

Additionally, as a Family Business Lawyer™, we meet regularly with many of our clients and their team of financial professionals throughout the year to ensure your financial and tax-saving strategies are supported by the legal implementation necessary to tie it all together and ensure it works properly. To find out if we are available to support you in this way, contact us today.

Create Your Tax Projections

Once you’ve got your LIFT (legal, insurance, financial, and tax) team in place, you should meet monthly with your bookkeeper—within the first 10 days of the month—to review your profit and loss statement (P&L). You should review the categorization of your income and expenses each month, rather than scrambling to get your receipts to your CPA in February or March just before taxes are due. Your bookkeeper should have your books reconciled, including all bank accounts and credit card expenses, prior to this meeting.

To be most effective, your bookkeeper needs to understand all of the ways you earn revenue and know the expenses required to fulfill the delivery of your product and/or service. Using this knowledge, your bookkeeper should update a daily forecast each week, and produce your monthly P&L, so you can stay regularly appraised of your company’s financial health and make strategic decisions on that basis.

Each month, when you review your P&L, you’re looking for variances from the prior month as well as expenses that are improperly categorized or not categorized at all. It’s crucial to categorize all expenses properly, so you can measure trends in your business and write off as many deductions as possible against your taxable income.

In late October or early November, your bookkeeper should send a year-to-date profit and loss (P&L) statement to your tax advisor, along with projections of income and expenses for the remainder of the year. Your tax advisor will then use that data to create tax projections based on your current earnings versus expenses and how much you expect to bring in over the remainder of the year.

Using these projections, you can put strategies in place to minimize your tax liability. That said, most of these strategies need to be in place BEFORE the end of the year, so ideally, you should make sure you’ve started this process by the final weeks of November.

If your tax projections indicate that you’re going to owe money, meet with your CPA and us, your Family Business Lawyer™, to strategize the best year-end tax strategies to implement. And if you haven’t run your tax projections yet because you don’t have a qualified bookkeeper or tax advisor, we can refer you to the professionals we trust most.

Put Your Strategies Into Play

Once you have your tax projections ready, you want to look at whether you’re likely to be in a higher tax bracket this year compared with future years. Determining this will allow you to save on your taxes by managing when you receive your year-end income and pay your year-end expenses.

After reviewing that data, if you’re likely to be in a higher tax bracket this year than in the future, it makes sense to push taxes off into the year(s) when your tax rate will be lower. Even if your tax bracket is higher in future years, it still might be worthwhile to push your taxes off into the future. This way, you’ll be able to use those funds, which would otherwise be in the hands of the government.

This is the question to ask yourself: Can I make more money with those funds now than I’d pay in higher taxes by pushing those tax payments off until later?

If you can make more money now, you can decrease this year’s taxes by pushing income into the future and accelerating expenses that you’d otherwise pay next year into this year, or even use additional available cash to fund tax-deferred retirement plans like 401(k) or IRA.

If you’d prefer to pay taxes this year because you’re currently in a significantly lower tax bracket than you are likely to be in future years—or you have losses that will be expiring to offset your income—you should increase this year’s income. One way you can generate more revenue now is by offering year-end discounts on products and services that may not need to be delivered until next year.

Plan Ahead To Maximize Savings

Managing when your company receives income and pays expenses in this manner can save you big money on your taxes, not just for 2021, but every year. And this type of creative tax planning is just one small part of an effective tax-saving strategy.

There are countless other ways you can strategize to keep more of the money you earn working for you, rather than giving it to the government. To learn about all of the potential ways you can save on your 2021 taxes and beyond, contact us, your Family Business Lawyer™ today.

This article is a service of Sky Unlimited Legal Advisory PC, Personal Family Lawyer® . We're not your traditional law firm, we stand apart from the rest by helping you make informed and empowered decisions on how to deal with your business throughout life and in the event of an emergency. We offer a complete spectrum of legal services, including a New Business Planning Session or an Existing Business Review Session, which includes a review of all the legal, insurance, financial, and tax systems you need for your business. You can begin by calling our office at (650) 761-0992 today or book online to schedule a Business Planning Session and mention this article to find out how to get this $950 session at no charge.