Business owners who generate profits due to their hard work and astute decisions often discover that running a successful enterprise can also have a downside. All things being equal, as profits increase, so does tax liability. A professional tax planner can be a valuable part of a business team, using their expertise to provide strategic advice and keep tax liability to a minimum.
Fail to Plan? Plan to Fail
Tax planning is the assessment of a taxpayer’s financial situation to minimize the tax liability using provisions in the current tax code. It is an essential part of the financial planning process for any business. Handing over a percentage of one’s earnings to a governmental entity is always difficult, but paying more than is absolutely necessary effectively demonstrates negligence on the part of the business owner regarding their company’s profitability. It is not uncommon for business owners/shareholders to pay hundreds of thousands of dollars in taxes that could have been avoided through proper tax planning.
Tax plans are designed based on the circumstances of the taxpayer. In a situation where a business is an integral part of the tax planning, the company’s overall strategy will provide crucial information for the tax planner as they put together the optimal plan. There will be times when having the absolute minimum tax liability may not be the most desirable when considering the strategic growth plan of the business.
Two of the strategies businesses can enact as part of a tax plan include deferring taxable income and the implementation of an employer-sponsored defined contribution account.
Deferring Income
Deferring taxable income to the future is a common tax strategy employed by businesses. Business clients are encouraged to pay outstanding invoices in the last month of the year to maximize their annual expenses. The counter side to this is the businesses receiving the payments experience a substantial increase in their revenue, which could increase their profits and tax liability.
To counter this effect, businesses with significant outstanding accounts receivable in the last month of the year should try to defer payments to the following year. This will result in the minimizing of their profitability which can reduce their tax liability, while improving their cash availability.
Defined Contribution Account
Implementation of an employer-sponsored defined contribution account can provide benefits for both the business and their employees. Employers may be able to take advantage of a credit for small employer pension plan startup costs. Qualifying businesses can take a credit of 50% of the eligible startup cost. Employees’ contributions to these plans are tax deferred. Both the credit and the contributions will increase the net profit and potentially decrease the tax liability of the business.
Don’t Go It Alone
Some business owners underestimate the role the business entity plays in the tax planning process. Every business has its unique strengths and weaknesses, which is why it’s always advisable to engage a tax professional to assist in assessing the pros and cons of each business entity.
Changes in the tax laws are to be expected as new provisions are implemented, and current ones expire or are extended. Staying up-to-date with the opportunities and challenges is part of every solid tax plan. Engage a tax professional for advice on additional tax planning strategies.
Founder and CEO of LEK Management Inc., Lynn Karam has two decades of experience in finance, operations, and strategic planning. Karam is an Enrolled Agent authorized by the United States Department of the Treasury to represent clients who are undergoing an audit and to negotiate with the IRS on her clients’ behalf. Her success rate in resolving even the most challenging of IRS scenarios has become the cornerstone of her success. As CEO, Karam uses her financial expertise to establish sustainable strategies that result in significant business growth for her clients.
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