When to do Business Tax Planning? Year-End or Beginning of the Year?

One of the most stressful tasks of entrepreneurs is to do tax planning. However, by taking the appropriate steps at the right time, you can keep away from this stress. Proper tax planning also enables you to save an amount on your income tax. The major purpose of tax planning is to ensure tax efficiency. It also makes sure that the financial planning elements are working together with high efficiency.

Moreover, tax planning is one of the steps to manage your finances. However, which is the best time for your business tax planning? Some entrepreneurs like to do it at the beginning of the year, while others prefer the end of the year.

Why do entrepreneurs like year-end tax planning?

In most cases, life insurance agencies offer new products when it is tax planning season (December-March). This is because they also make their yearly sales at that time. Moreover, the health insurance product sales reach a higher level during this period. It is because of the tax-related benefits that you can obtain from the health insurance premium. That is why several Indians like to think of their taxes at the ending months of the year. Still, one of the best tax planning tips for you is to choose the early part of the year.

However, late tax planning can result in several issues-

1. Chance to make inappropriate choices

When you have chosen year-end tax planning, you may be in a rush to make a decision. For instance, you may have thought of managing the highest permissible limit based on the Income Tax Act (section 80C). However, you will ultimately need to pay a heavy premium upfront amount for the chosen financial instrument for the subsequent years.

Although you could identify your mistake, it would be very late. With the earlier investments, you can choose the best tax saving schemes. Moreover, it may not be easy to reduce your tax liabilities within a short time.

2. A risk of unnecessary investments not relevant to your financial targets

You have to know your financial objectives before dealing with your tax planning activities. Therefore, it is essential to understand your finances and pay attention to every detail meticulously.

As these are time-consuming tasks, you have to work on them at the beginning of the year. But, most importantly, you should choose the right tools in which you like to invest your amount.

For instance, when you try to save your money on tax for a long-term goal, you can look for tax-saving mutual funds.

Why should you choose earlier months for tax planning?

One of the best small business tax tips to add efficiency to your tax planning is to take the initiative in the early months of the year. The last-minute issues with tax filing can cause several hassles. However, you can manage deductions according to the Income Tax Act by taking your tax planning steps without any delay.

Under Section 80C, you have an opportunity to claim your tax benefits of up to Rs. 150000 in a year. The benefits will be available with your investment in PPF, EPF, and other schemes. Moreover, under Section 80D, you can claim Rs 25000 for medical insurance.

Your focus should not be merely on the tax reduction. It is essential to have a long-term view. You can combine your investment planning with tax planning activities. It helps in reaching your financial goals while saving tax. You may find several tax-saving investment options. However, the smartest taxpayers choose ones that keep up their financial status. By starting earlier, you will find the potential of increasing your savings.

Fixed income investments are best for conservative investors. But, they do not know about the liquidity of those financial products. You must check your liquidity needs and risk appetite. Based on it, you can make a proper allocation of your investments.

Other reasons to do your tax planning earlier-

1. Benefits available with regular investments-

Early tax planning makes it easy for you to identify the monthly investment that you have to make. As a result, you avoid a large amount of outflow at the end of the year.

It has been noticed that investors ultimately save a small amount of money while they have invested in the last few months of the year.

2. Avoid additional payments-

Late tax planning can result in a delay in your tax payment. You will ultimately need to pay the penalty and the interest on the owed tax. By planning the business tax early, you can keep away from these issues. Moreover, you can pay attention to every minute detail.

3. Funds are available with you-

Some of us think of saving on tax at the end of the year. However, you may not have a good amount of funds for investing in your tax-saving schemes during this period. Early planning will enable you to make the monthly payment without much stress.

4. Get your refunds faster-

By paying your tax at the right time, you will take advantage of faster refund processing. Thus, as you have filed your tax return on time, it will undergo processing without any delay. In addition, the refund will access your bank account.

Year-end tax planning? How to avoid issues-

Although the year-end tax planning has some demerits, some business owners like to stick to this decision. In the last few months of a year, you may be busy, as you need to deal with the account. That is why you have to create a perfect strategy to get the tax return at the right time. Check out those strategies for your year-end tax planning.

1. Never wait for the last minute:

Procrastination can cause a big issue in your year-end tax planning activities. As another financial year is going to start, you must not delay for any reason. Your earlier steps will make your tax filing easier. The best option for you is to create a schedule every week and do your tax planning tasks.

2. Check the financial health of your business-

The last months of a year can be the best time to check the financial status of your business. To know your business’s performance, you have to analyse your income statement, balance sheet, and cash flow statement. These financial statements will help you to calculate your profits and losses.

3. Think of tax deductions for which you are eligible-

Before closing the accounting books, you can find out the available tax deductions. Find the deductions applicable to your business. Then, you can deduct them properly. Tax deductions for small businesses include-

Business car usage
Travel costs
Home office
Charitable contribution

4. Make some essential purchases:

It is one of the best ways to increase tax deductions. You can buy some items for your business needs at the end of the year. These tax-deductible items include equipment, company vehicles, and office kits, like paper.

You can list the type of items that you like to buy before the year ends. Then, take this step to reduce taxes for the current year.

Conclusion

You have already learned some tax tips for business. Tax planning is one of the ways of increasing your tax returns. You can avoid penalties and take advantage of the potential tax deductions. It is better to concentrate on tax planning in the early months of the year.

Also read:

1) What Happens to Indian's Tax Money after Payment?
2) Top-10 Highest Tax Paying States in India
3) Why Do We Pay Income Tax in India? Importance, Applicability & more
4) Types of Direct & Indirect Taxes in India
5) OkCredit: All you need to know about OkCredit & how it works.

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FAQs

Q. Which is the best month for tax planning for your business?

Ans. Lots of entrepreneurs choose September as a favourable month for their business tax planning. In this month, you can start calculating the due amount of tax and your taxable income. You have to focus on both your overall income and your profits from the self-employed business. So it will help you to find taxable income. In the case of the home-based business, there is an option for deducting a part of the mortgage interest. For instance, you may deduct almost 10% of the mortgage interest.

Q. Do I need professionals for tax filing?

Ans. When you cannot file the business taxes and have become confused, you may engage professional accountants and business tax consultants. They will make your tax filing easier.

Q. Tax planning includes exemption and deduction. So how do these two terms differ from each other?

Ans. You can enjoy tax deductions while you have tax-free income. On the contrary, tax exemption refers to the expense that helps in lowering the taxable income.