Navigating your taxes can be a nightmare for anyone but small businesses are exceptionally vulnerable when it comes to dissecting tax issues and making optimal decisions for financial health. The best time to consider your tax position and plan for the inevitable isn't at the end of the year, or even the start - its all year long.
A few simple strategies, applied throughout the year, can help to minimise your tax headache at year-end.
TRADITIONAL TAX PLANNING
Traditional tax planning involves keeping an eye on all the comings and goings throughout the year and attempting to maximise all possible deductions and credits while deferring as much income as possible. Most small businesses are cash-basis, which means they declare income when it is received and deduct expenses when they are paid. Therefore, expediting payments for expenses while deferring chasing up debtors at year end can potentially improve your tax position.
However, if you are projecting even better financial performance in the next year it may be wise to declare as much income as possible in the current year so as to avoid any nasty surprises in the next year. It may also be wise to delay any major capital projects until the time you project greater income levels to support the added expenditure and to avoid an upset to your cashflow.
TAX IMPLICATIONS OF FRINGE BENEFITS
Fringe benefits such as a company car, meals and employee insurance packages can be great ways to attract and retain talented staff to your business. However, all of these items have special rules that relate to their taxable treatments. Understanding the tax implications of providing these sorts of benefits up front is important to avoid a shock at year-end.
Not having a clear understanding of the taxable nature of fringe benefits and any adjustments that need to be made at tax time can be a real burden on a small business and may unexpectedly increase your taxes payable.
CONSIDER DECLARING YOURSELF A SALARY
If you are self-employed and living off the drawings you take from the company, it may be wise to consider declaring yourself a salary and making the appropriate monthly PAYE payments to the IRD. This may have the dual impact of not only spreading your personal tax obligations across the full year but will also enable you to contribute towards your retirement via KiwiSaver deductions if you are a member of a KiwiSaver Scheme.
None of us can work forever, no matter how much we love our jobs. If you don't currently have any plans for your retirement it's worth having a discussion with an expert to help you navigate the options and choose the correct path that will serve both your business and personal financial health now and in the future.
THE SILVER LINING IN A LOSS
Most small businesses will make a loss during the first few years of operation. This means that the allowable deductions are greater than taxable income. Although many may think this is bad news, a loss can be used to recover any Provisional Tax payments made as well as prevent any additional tax payments at year-end. If you operate a group of companies with a common shareholding, you may also be able to use the loss from one venture to offset the taxable profit in another.
Any losses not used in the current year can be carried forward and used against future years taxable profit. It is important to correctly record any loss in your tax returns, as well as any losses you have to carry forward from previous years. Failing to record these properly may result in you losing these losses and their tax benefits will be irrecoverable.
INVEST IN YOUR BUSINESS
Tax planning shouldn't be a year-end scramble, it should involve a consistent, yearlong conversation with your accountant. It's better for your businesses continued financial health, and your personal sanity, to work with a professional who can provide meaningful advice and discuss your options with you. Establishing a strong relationship with an accountant or tax advisor will save you significantly as your business grows.
The above discussion is general in nature and may not be appropriate for you or your business. Professional advice should be taken prior to making any decisions. For a comprehensive discussion, specific to you and your business, give our team a call on (07) 378 66 55.