For many small business owners, the only challenge greater than maintaining an effective accounting and bookkeeping system is preparing effectively for taxes. As a result, a high percentage of small businesses pay more in taxes than they need to — or find themselves paying unevenly from year to year. Either way, the result is more stress and less cash than you have to accept.

Here are four essential tips you can use to improve the effectiveness of your small business tax planning:

Tip #1: Don’t Spend Just to Spend

Since most small businesses reach the end of the calendar year desperate to reduce their tax burden, many entrepreneurs find themselves spending money and buying products or services that they (most likely) just don’t need. Sometimes, an accountant will even recommend this. Don’t do it.

Not only are you draining your short-term cash flow, but you’re also throwing money away on investments that may never truly help your business. Perhaps the most misunderstood math is that of the tax deduction. A dollar you spend is not a dollar you save! Rather, a dollar you spend is a dollar counted towards the deduction, which typically yields about one-third in actual tax savings.

Tip #2: Evaluate Whether to Accelerate or Defer

One strategy to consider when evaluating ways to even out your year-over-year tax liability is to accelerate or defer income or deductions. For example, you can apply this strategy to transactions such as selling property, leasing, inventory, compensation and depreciation or expense elections. For a company operating on the cash basis, one effective way to postpone income into the next tax year is to delay billing, and therefore move cash receipts from the current year into the next year effectively.

Tip #3: Consider Your Compensation

How you plan and time compensation is another critical point to consider with your tax planning. For example, in a C corp., the company’s taxes are reduced as compensation is paid to employees. However, in an LLC the company’s profit adds to the owner’s personal, taxable income.

Consider these factors when working with your accountant on an appropriate compensation strategy.

Tip #4: Plan and Prepare for Retirement

Company retirement plans, including 401(K) plans, SIMPLE plans, IRAs, profit sharing and pensions can reduce the company’s taxable income and help reduce taxes when the reasonableness threshold for salary compensation has been reached. In addition, businesses receive extra time from the IRS to take advantage of retirement plans prior to submitting their taxes each year.

However, the key is to be properly compliant with the law and proactive in establishing such plans, even if they are funded at a later date.

By following these four tips, you will be well on your way to creating a sustainable, successful tax strategy for your small business. Consult with your professional CPA to develop a comprehensive tax strategy for the 2015 tax year and beyond.

Selected Sources:

• Avoiding Mistakes with Your Small Business’s Tax Planning
• Small Businesses: 8 Great Year-End Tax Planning Tips and Tricks: A Must Read
• Tax Planning for Small Business Owners 

Image Credit: 401(K)2012 (Flickr @ Creative Commons)