Want to avoid tax surprises? Adopt these 5 business habits
Planning for yearly tax bills and other tax-related business costs doesn’t have to be difficult. Business finance experts say small but important business habits can help avoid common pitfalls.
Know your numbers
Understanding how much tax your business owes after year-end starts with knowing your personal and corporate tax rate percentages, says Matt MacDonald, Ontario-based business advisor and national leader of food and beverage with MNP.
Many food companies are incorporated, or will eventually incorporate, to access lower income tax rates. These rates vary by province, although the Canada Revenue Agency reports the national base rate for Canadian-controlled private corporations claiming the small business deduction is 9%. In Ontario, for example, the small business deduction lowers the provincial share of corporate income tax rate on the first $500,000 of active business.
A lot of strong tax planning ties into cash flow management.
For instance, MacDonald says a combined federal-provincial corporate tax rate of 12% would be applied to small food businesses with income of $500,000 or less after expenses. This is the small business tax rate. After expenses, any income above $500,000 is taxed at a higher rate. Small but growing businesses must account for this distinction.
Here are five important business habits small food and beverage processors can adopt to avoid tax surprises:
1. Plan ahead
Be aware of the tax rate you will pay and begin saving now for the next tax season. Strong tax planning is done a year in advance, says MacDonald, when sales projections are being made. That’s because taxes are tied to success – the more the income, the higher the taxes.
2. Manage cash flow
“A lot of strong tax planning ties into cash flow management,” MacDonald says. Consider that with every dollar earned, 20 cents is for taxes.
“Setting it aside is just good business practice. Think of it like paying rent. You don’t wait until the end of the year to pay rent,” MacDonald points out.
3. Be disciplined
Despite taxes being one of, if not the greatest, business expense for most businesses, MacDonald says taxes are often at the bottom of people’s management priorities. You know they’re coming. You can estimate how much you will pay. Be rigid with saving for that tax bill.
4. Hire the right professionals
Proper management of tax payments and assessments can reduce the chances of costly mistakes.
“Find the right partners for your scale of business. They are the differentiators for businesses that are operating at a successful level,” MacDonald says.
And, he points out, that goes for tax matters and the variety of other issues food and beverage processors deal with daily. “You don’t need to be an expert at everything. Having the right people around you is a hallmark of successful businesses.”
5. Keep accurate records
Day-to-day operations can make it hard to keep accurate records. For Gerard Fitzpatrick, an accountant and partner with Fitzpatrick & Company in Charlottetown, P.E.I., this is particularly true when businesses are trying to launch or scale up. Even though work is intense, Fitzpatrick encourages business owners to access bookkeeping tools from financial institutions, companies and advisors. Plus, when your experts need details to help in their advisory roles, you have the details close at hand.
Planning, managing cash flow, discipline, working with experts and accurate records won’t take away taxes, but they will help manage the uncertainty of surprise tax bills and help ensure there is money in the bank to pay the tax bill when it does arrive.
Article by: Matt McIntosh