PROACTIVE TAX PLANNING FOR YOUR BUSINESS
Business tax planning is the process of structuring a company’s financial affairs in order to defer, reduce or even eliminate the amount of taxes payable to the government. A business owner is allowed to manage their company’s finances in a way that minimizes income taxes as long as it is done in accordance with the provisions of the Internal Revenue Code (IRC). Although tax laws can be complex, there are plenty of opportunities to use strategies that legally reduce your company’s tax bill. The IRC contains also provisions intended to limit overly aggressive tax plans and the Internal Revenue Service is tasked with auditing businesses to ensure compliance with tax regulations. With that in mind, a business owner must decide how aggressive to be in their approach to tax management. Our philosophy is to be aggressive while also staying within IRS guidelines.
Efficiency Is The Goal
A business owner should start with the end in mind. What is the goal? And what needs to be done now to help the company reach the desired goal? In our opinion, the best goal is to reach a high level of “tax efficiency” rather than attempting to drive the overall tax bill close to zero.
Steps to Reach High Tax-Efficiency
There are some key steps that every business should follow to make sure their tax planning initiatives will achieve the best results. Whether your organization is in the start-up phase or is already well-established, tax efficiency needs to be an integral part of your overall business plan.
Here are somethings you can do to reach high tax-efficiency.
Proper Accounting Systems
If a business desires to minimize its tax liability then Step #1 has to be maintaining accurate accounting data. There are a number of good accounting software programs that can help the business owner keep accurate records of income and expenses. But a certain rule applies: the report output is only as good as the data being input. It is imperative for the business owner to know what counts as income and what actually counts as legitimate business expenses. It is not uncommon for business owners to overpay on their tax bill by double recording items as income or booking receipts as income that actually don’t qualify as income.
On the other hand, there are many business owners that record expenses improperly that don’t qualify as true business expenses. This results in income that is understated and could result in tax penalties if an IRS audit reveals that expenses were improperly recorded.
Business owners are best off if they outsource the accounting and tax preparation function. That could mean hiring internal staff to do it or hiring a bookkeeping/CPA firm. For small firms that need to maximize their budgeting efficiency, hiring a bookkeeping firm can be a very good use of resources.
Proper Entity Structure
One of the most critical decisions for any business is to choose which entity type makes the most sense. The choices include Sole Proprietorship (doing nothing at all), Partnership, Limited Liability Company, or Corporation. Each of these entity types have unique tax characteristics that should be considered by the business owner. Some entities have hybrid characteristics such as the S-Corporation, which is one of our favorite entity types for tax planning. We can help you determine which entity is most appropriate for your business.
Use Tax Credits And Deductions That Apply To Your Business
The tax laws change every single year as Congress enacts new laws. Some of the most overlooked items that are added to the tax code are tax credits that are meant to spur certain types of business activity. Here are a few that may benefit your business:
1. Qualified Business Income Deduction (20% of business profit on self-employed tax return )
2. R&D Tax Credit (very useful for high-tech startups)
3. Energy Efficient Home Credit (for home builders)
4. Work Opportunity Tax Credit (for hiring employees)
5. COVID-related payroll credits
There are many other tax credits that your business could benefit your business. Additional information can found here: https://www.irs.gov/businesses/small-businesses-self-employed/business-tax-credits
Put Expert Consultants On Your Team
Because the tax code is so complex it is usually necessary for a business owner to work closely with a qualified tax professional who can provide expert guidance. The value of incorporating a good CPA into your team of most trusted professionals cannot be overstated. Sadly, most business owners don’t visit with their CPA until after the year is over so they can prepare the prior year tax returns.
We do not offer bookkeeping or tax preparation services, but we work closely with local, expert CPA firms that can serve as a trusted consultant to your business. Our services are designed to coordinate our planning activities with these other experts so you have checks and balances in place to make sure recommended strategies are right for your organization.
ARE YOU READY TO CREATE A PLAN TO MANAGE YOUR BUSINESS TAXES?
Getting started is easy. The first step is to let us know how we can help you. Just fill out the simple contact form below and we will be in touch with you right away – or just call us at 480-699-5540.