For starters, you should create and implement policies that will simplify the process of planning for tax. Having separate accounts for your business and personal use may seem like a very simple decision. However, it can have a significant impact on simplifying the process of calculating your taxable income. With separate accounts, you need not worry about the possibility of personal expenses being claimed as deductible business expenses.
If you prefer planning at the end of the financial year, then using new-age technology for proper document management can prove very beneficial. Scanning of documents on a regular basis and maintaining digital records will reduce the time and effort involved in planning for tax. You can use file-sharing services or even good old email to send all the necessary documents and vouchers to your tax expert Tax Expert.
Of course, you can also hire a less expensive expert even if he or she is not located in your city if you have all the necessary documents on your hard drive. You can consult with the expert over the Internet and save a lot of time and effort in the process.
Scanning all the documents will help you in the event you are audited. Proper document management will prevent situations where you don’t have documentary proof for expenses claimed as a deduction. Of course, the digital version may not be admissible as proof but creating a scanned version will prevent unnecessary handling of documents once you have filed the same.
Planning for tax may seem like an unnecessary task in a bad year. However, you cannot conclude tax planning is unimportant simply because your income has come down. Such bad years, if used properly, can help you save tax when your income increases in the future. Ignoring tax planning in such years may lead to complications in the future.
If you anticipate your next year to be better than the current year, then deferring expenses to the next year may help reduce your overall tax liability. An increase in income may result in computation of tax at a higher slab. In such a scenario, deferring expenses can help reduce your overall tax liability without violating the law.
Simply deferring payment of an expense to the next year will not help if you follow the accrual system of accounting. The expense will be considered deductible in the year in which it became due irrespective of when it was paid. Hence, make sure the obligation to pay the expense and the actual payment occurs in the right financial year.