How to Avoid Financial "Heartbreak" During Tax Season

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Keila Hill-Trawick: Hello. You're listening to Build to Enough, a podcast for entrepreneurs who want to scale at their own pace. I'm your host, Keila Hill-Trawick, and I'll be your chief storyteller and cheerleader in a world that glorifies endless expansion, we're tuning out the noise and discussing the beauty of enough. Each episode will dive into inspiring stories, practical insights, and strategies to cultivate sustainable success on your [00:00:30] own terms. So whether you're a solopreneur or small business owner or aspiring entrepreneur, get ready for a refreshing take on the entrepreneurial journey. This is build to enough.

Keila Hill-Trawick: Hello and welcome back. All right, so tell me if this is relatable. I mean, you can tell me. You can just, like, nod along, say it's tax season and all of a sudden you are looking for your documents. You are stressed. You are finally getting everything that you need to to your accountant. [00:01:00] And then they give you your return back and you're like, what? How much do I owe? You are shocked by the number because you feel unprepared. That is what I'm calling financial heartbreak. It is this feeling of unexpected liabilities or unfilled deductions or just generally not feeling prepared. And what we know is that you can be proactive to avoid these pitfalls, but not everybody knows where to start. You want the same financial stability and [00:01:30] peace of mind that all of us do. And it can feel hard to figure out exactly how to stay ready so you don't have to get ready. Also, when you have poor tax planning or poor financial planning overall, it can just be hard for you to keep up with that on top of all the other jobs that you're managing as a small business owner.

Keila Hill-Trawick: So even if you have administratively, you know, the steps that you're supposed to be doing when something falls like emotionally, mentally, it just feels really overwhelming. So [00:02:00] why does this matter when it comes to build to enough? Well, the first thing is financially, you got to have money to the side to be able to pay your tax liability. And you want to make sure that that liability isn't bigger than it should be. We need cash for a variety of things in our businesses, and we don't want to pay the tax man any more than we have to. But we do want to meet our obligation. Yes. All about compliance here. So when you can avoid tax surprises, you have better cash flow, which is one of the leading causes for why businesses [00:02:30] fail or go out of business. It's because they can't predict when money is going to be coming in versus when it has to go out. And then if you can't predict that, it's hard to know if you're going to have enough money available to pay the operational costs, as well as the taxes that are going to be associated with what you make throughout the period. Now, when you're figuring out your enough, we know that this takes financial planning. It takes time planning. It takes figuring out what you really want to be doing in your business.

Keila Hill-Trawick: It takes capacity planning, [00:03:00] right? And when you can determine how much you owe in taxes in a proactive way. This makes sure that you don't derail not just those business goals that you have for yourself, but personal goals. Maybe you are looking to move, or take a sabbatical, or take your kids on a big trip. And when that money that you had saved to the side that you thought was available to you has to actually go to pay a big tax surprise. It can leave you crestfallen, right? Like it is not [00:03:30] a good feeling to think you had money that didn't actually belong to you. So the first thing that I'll say is think about how you can plan in advance. Remember that when you file your tax return, it is just paperwork to associate with the year before's income, expenses and tax payments already made. So the to the extent that you can make sure that there is money available because you have some sense of how much you should have put to the side, you can put that extra funding [00:04:00] that you have in your bank account towards growth opportunities instead of unexpected liabilities. Right? You know that the money that is in your operating account actually belongs to you, and you probably have a separate tax savings account that you know doesn't actually belong to you. That is money that is probably going to have to go to the IRS and or your state. This does take intentionality, like you're going to have to be really intentional about the money that you save and where you put it.

Keila Hill-Trawick: And taxes are a really big way to align [00:04:30] preparation with your long term stability. We're all going to have to pay taxes pretty much throughout the year. Sometimes it feels like it is always tax season, and the more prepared that you can be for that, the more prepared you can be for all of the other cash needs that your business has across a period. All right. So how do we do this for clients. So the first thing is we make it a requirement that you have a bookkeeper. So it can be us. We love when it's us, but we [00:05:00] also have bookkeeping partners that direct their clients to us for tax support. And that makes the bookkeeper and our mutual client. That's who we serve, right? This is because we want to make sure that all business owners have the expertise in tracking their income and expenses consistently using accounting software, making sure that things have been reconciled, that nothing is double counted or missing. When people ask me, how can I save on taxes? Bookkeeping is one of the top ways to do that. If that's [00:05:30] accurate, then we can make sure that what you are reporting on your tax return is accurate, and what you're doing with estimates throughout the year is appropriate. Speaking of estimates, we review quarterly estimated taxes. So every quarter we're looking at our client's year to date profit.

Keila Hill-Trawick: We're determining how much we would expect for them to have to pay based on their marginal tax rate to the IRS and to the state, and then we subtract out what they've already paid for the year. So we know that there's a lot of inconsistency [00:06:00] with profit. And so if you had a profit and we made a payment and then you have a loss, maybe you don't owe anything this time. We always want to be looking at your current data versus using the vouchers from last year, because we all know that finances change year over year, and you want to be prepared with what you're going through this year. The next thing is we want to have clear communication, right? So for our monthly clients every month we're talking to them about their profit. We're talking to them about where they stand versus budget or analyzed against [00:06:30] prior periods. And for our tax clients, when we do those quarterly estimates, when we do those tax planning calls that I'll talk about in a second, we also want to bring up the things that we see in the books. Hey, this hasn't been reconciled. So we want to make sure that that's accurate. Hey, this account is negative and it shouldn't be. You may want to look at that. Hey, these accounts receivables are really old. Are you expecting to actually get paid for those? Because if not, we may be counting income that you're not going to receive. And so looking at where clients stand financially, [00:07:00] giving them ongoing communication and also just being around for questions specifically for our monthly clients, we know that things come up around their finances, information that they have that might affect what's going to go on with their financial statements for the next period, giving that to us so that we can be proactive for tax clients.

Keila Hill-Trawick: It may be something that they've seen online about a deduction or a reporting that keeps going back and forth about whether they need to file it. And we want to be available to be able to not just [00:07:30] answer it for the client that asked, but for our whole client roster, because they probably have a similar question or didn't know that they needed to know this information. And we do that through a regular newsletter that we send to clients, keeping them up to date on what's going on with the business, but also what might affect them overall for their companies. Finally, we have mid-year and year end tax planning sessions, which are a combination of. This is where you stand so far with your taxes, what is coming up for the upcoming period that we should [00:08:00] be aware of that might affect your taxes, and where are there strategies that we might be able to incorporate to lower your tax burden? We do this in a holistic way, because what we know and what you know is that taxes are not the only financial obligation that you're responsible for. And we want to make sure we're not telling you to spend money to money to save taxes when you may be coming up on a low period and you're going to need that cash for other reasons.

Keila Hill-Trawick: A great example of this is our tax prep sweet clients. So I can think of one client in particular who came to us and was basically like, [00:08:30] I don't know what I owe on taxes. I could owe 1000 or 10,000. I will not know until you file my return. And that made me nervous. Um, but what we also wanted you to know, and that we explained to them through our service, was you don't have to work like that. I think a lot of times tax returns can be presented as a black hole that only experts know. But we know that through quarterly estimates, through tax planning, you can have a real sense of what is coming up for you on your tax return well in advance. [00:09:00] So how do you do that? The first thing is start early. You want to gather your information as early as possible. The tax deadlines don't change. They are like Christmas. They're pretty much going to be the same every year. But you also know what documentation is likely coming. You run a business, so you know you're going to need financial statements the sooner that you that you can get those done after the end of the year, the better available they are for your tax preparer. The next thing is, you know that forms are coming and I'm just talking to me. [00:09:30] If you are a person who typically puts them on your kitchen counter and then thinks about them later.

Keila Hill-Trawick: Go ahead and take a picture and put them in the online storage of your choice. That way, when your tax person asks for them, you're not running around looking for them. Also, keep in mind and hopefully your tax preparer, like ours, has a system in place to show you what you've already given, so you're not starting from scratch every year. Also, use a checklist. So we send our clients an organizer every year that says do you have [00:10:00] this kind of income? If so, upload here. But if you're doing this by yourself or kind of trying to figure it out, use a checklist that you got from a prior year. Prepare so that you know what's going to be asked of you, and you don't feel like you're rushing to get it at the last minute. The next thing is set aside funds for taxes. I mentioned this earlier, but you really want a separate bank account that you're putting your taxes aside. Why? Because you need to know that it's not mixed in with other funds. This is not cash that's available to save you in an emergency [00:10:30] or cover operating expenses. Now work with your accountant so that you can calculate an appropriate amount, and then put that aside every month based on your profit. Figure out what your percentage is and push that to your tax liability account. I know life happens and sometimes you see that money over there and you're like, I'm not giving that to taxes.

Keila Hill-Trawick: I need to use it for something else. But at the very least, you need to know what that hole would be. If you need to have $5,000 saved for taxes and you need to take two to spend on something else, just be aware [00:11:00] that that $2,000 is likely going to be due from you when you go to file your return. Also, stay organized year round. I mentioned earlier that we require bookkeeping, and part of that reason is because we really want to make sure that we are capturing the accurate amount of categorized income and expenses in accounting software. A lot of people start with a spreadsheet and no shade. You use what you have for the area that you're in. But then you get to a point that you really need to track beyond that. And an [00:11:30] accounting system is really going to go a long way to help automate that process so that you don't do it by hand, which also helps you to do it faster and earlier. Also to make sure to save your receipts and digital records, so that when you have deductions that you need to support, you know exactly where to find that backup. Also, work with a professional. There are so many things that you can DIY, but that doesn't mean that you should. And it can be really hard to do your accounting and your taxes alone. You also may not know all the rules, so consulting [00:12:00] with a tax professional, make sure that you identify deductions and credits that are specific to your business.

Keila Hill-Trawick: You want to work with somebody who works with people like you, so that they can call out things that you might not have been aware of, and you can like your accountant. In fact, you should. So don't wait till the last minute to find somebody to support you. Find those conversations throughout the year so that you're getting the right fit when it's time to go, file your return. Finally, review and adjust if you're listening to this during tax season. [00:12:30] I mean, even after tax season. Use that filing as an opportunity to review your business structure or your tax strategy to make sure that it aligns with your short term and long term goals. Remember, you are filing taxes for last year, so in the current year, you want to make any adjustments or changes that you need to to be prepared for next year's filings so that we can avoid all that stress that I talked about at the beginning of this episode. It was so good to have you, and we'll talk next time.

Keila Hill-Trawick: Thank you for tuning in [00:13:00] to another episode of Build to Enough. If you enjoyed today's episode, don't forget to subscribe, rate and share the love with your fellow entrepreneur friends, and make sure to sign up for the Build to Enough newsletter. The link is in the show notes. Stay tuned for more episodes as we continue to redefine success. One intentional step at a time.

Creators and Guests

Keila Hill-Trawick, CPA, MBA
Host
Keila Hill-Trawick, CPA, MBA
Helping entrepreneurs create and maintain the business they want | Building to Enough | LinkedIn Top Voice | Intuit Partner Council | Accounting Firm Owner
How to Avoid Financial "Heartbreak" During Tax Season
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