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Major Differences Between Tax Filing and Tax Planning

Find out how tax filing and tax planning are different, along with how to optimize your profits by carrying out tax planning before filing your returns.

If you think you can use the terms tax planning and tax filing interchangeably, you'd be wrong. Tax filing should follow tax planning and not the other way around. Once you file your returns, you can't go back and plan your taxes.

According to your status as an employer or employee, tax filing comprises preparing and submitting taxes to the IRS within a given deadline.

On the other hand, tax planning means consulting a finance professional and availing of all tax concessions available to you as an individual or a business. This results in minimizing taxes and achieving tax efficiency.

You don't need to go through tons of tax codes to plan your taxes; you can outsource it to professionals like accounting professionals and bookkeepers.

Take Shantel Johnson, for example. She is in her mid-30s and the owner of an advertising agency in Louisiana, New Orleans. This mother of three was having a hard time managing her agency and planning her taxes.

She wanted to focus on her advertising agency and her family, not understanding tax returns. She outsourced her bookkeeping work to a professional firm and is now able to realize her business dreams.

How Can A Bookkeeper Help Me With Tax Planning and Filing?

There is no one-size-fits-all when it comes to tax planning for individuals and businesses. A bookkeeper will suggest the right strategies so that you or your business pay the least amount in taxes. Bookkeepers often use tax planning software to enter all relevant data, giving you a blueprint for your tax savings for the year.

Tax planning is not a once-off activity; it needs to be performed throughout the year. Some of the areas that a bookkeeper looks into are:

  • Contribution to employer-sponsored retirement plans
  • Eligible tax-deductible contributions under both Roth or Traditional IRA
  • Any long-term capital gains accruing for that financial year
  • Decisions regarding the prepayment of future charitable donations and more

Note: 2021 tax rates and brackets for your business In case of Business or profession income , the option to choose between the tax regimes is available only once for a particular business

The Role of a Bookkeeper in Tax Planning

A bookkeeper helps a business maintain meticulous financial records. When you want to claim tax concessions, these records come in handy. Some of the top deductions for small businesses are:

  • Business Meals: You can claim this deduction provided you have kept a record of the date and location of the meal, the client's name, and its total cost. Bookkeeping entails the safekeeping of vouchers and receipts of expenses so that you can claim deductions easily.
  • Transport and Hotel Expenses: Plane tickets and hotel bills are preserved by bookkeepers so that you can claim a tax deduction by the end of the year. To qualify for a deduction, it must be a business trip away from your tax location, and it should be more than a day in its duration.
  • Business Insurance: Your business needs various types of insurance to adhere to state and federal regulations. Bookkeepers file premium paid by you for insurance, and you can claim this as a deduction.
  • Office Stationery and Supplies: If you have receipts for all stationery and supplies purchased for your company like printers, computers, or paper within the financial year, these can be claimed as business expenses.
  • Interest on Loan and Credit Cards: Whether you pay interest on a business loan or business credit cards, they can be written off against your revenues to reduce your taxable income. Annual credit card fees or any other fees or charges associated with your bank account can be charged against your profits.
  • Home Office: If you are operating from your home, you can avail of the simplified option for home office deduction. You can charge up to $5 per square foot up to a maximum of 300 square feet. This area should be exclusively used for your business, and you should regularly operate out of this place.
  • Fees For Professional Service: All your legal and bookkeeping expenses are tax-deductible, including any bookkeeping software. Make sure that you get proper invoices from your lawyer and bookkeeper to avail of these deductions.
  • Employee Salaries: Tax deductions are available for salaries and statutory benefits paid to your employees, including paid leave. You need to fulfill certain criteria to qualify for this deduction, such as payment of a reasonable salary to the employee and ensuring that the employee performed the duties mentioned. The employee can't be a partner or LLC member.
  • Contributions to Charity: Charitable donations made to qualifying organizations are tax-deductible. For LLCs or partnerships, this deduction is claimed against your personal tax return. If you have a company, then the deduction can be claimed against your company's tax return.
  • Contribution to Retirement: You can claim contributions to an Individual Retirement Account or IRA subject to the annual maximum contribution. The IRA contribution should not exceed your annual income. If you are under 50, you can contribute up to $6000 annually.

Owning a small business? Here is all about tax deadlines and various due date relaxations will reduce the compliance burden for businesses that have been struggling in the current crisis.

These tax deductions help in lowering your tax expenses due to the government. If the bookkeeper maintains proper records of all financial transactions, you can plan your taxes and minimize the amount you pay in taxes.

Duties of a Bookkeeper

Here are some of the important responsibilities of a bookkeeper:

Data Entry:

This comprises keeping an accurate record of all financial transactions that take place during the financial year, including all income and expenditure incurred. You can calculate your cash flows to estimate your profit or loss.

Data entry is essential since you can monitor your expenses and keep your business viable. With modern tax planning software, all departments are integrated, making it possible to record all transactions without any duplication. Data enters the software from all the points of purchase and sales.

Bank Reconciliation:

It is important to reconcile all financial transactions according to your books of accounts with your bank statements. You can identify any fraud either in your company or unaccounted payment from the bank through bank reconciliation. There could also be an error in the data entry.

You can also mark tax-deductible expenses, so you save time when filing your returns. The tax planning software will have a link with your books of accounts and the bank, so you can verify if the transaction is correct or not.

Financial Reports:

The key financial statements for any business are the Balance Sheet, Income Statement, Cash Flow Statement, Aged Receivables, and Aged Payables. The Balance Sheet helps you to find out your financial position on any given date, while the Income Statement provides information on your profitability, and the Cash Flow Statement records the cash earned by the business. The Aged Receivables is a report on the debtors that need follow-ups, and the Aged Payables is a report on payments pending to creditors.

When all financial transactions are recorded and reconciled, availing of deductions for improved tax efficiency becomes easy, as you have all the information you need to file your federal and local tax returns. This includes sales tax, income, and payroll tax.

An overview of Section 179 tax deductions in 2021 the only stipulation is that the equipment needs to qualify for deduction.

The Role of Bookkeepers in Tax Filing

You must plan your taxes throughout the year so that tax filing becomes easier. Bookkeepers help you with tax preparation so that you have all the information needed to file your taxes when you need it.

Here is the role of bookkeepers in tax preparation:

Sales Tax Returns:

You pay sales tax every time you file the sales tax report. The bookkeeper records sales generated throughout the year and prepares a consolidated report.

Business Income Tax:

This tax is calculated on profits, so the higher your profits, the higher the taxes. Since bookkeepers maintain all records for deductions claimed by you, you can legitimately claim them and reduce your tax expenditure.

Payroll Taxes:

These taxes are collected from your employees. They need to be reported to the IRS with information regarding the net salary paid and tax withheld.

With the tax planning software, you can maintain a record of all collections and taxes paid so that you can file your taxes with ease.

Final Thoughts

As a business owner, you need to be able to focus on scaling up your business. The experts at Fincent can take care of your bookkeeping needs so that you can save time and money and regain the freedom to take your business to the next level.

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