Income Tax Planning
Whats the most tax advantaged group in the tax code? The answer may surprise you, especially if youre a business owner. But the answer is simple - you, the business owner are POTENTIALLY the most tax advantaged group in the tax code. Believe it or not, business owners get all the breaks. And no, the tax breaks are not just for the Fortune 500 companies, but the middle market, small business, or family owned business all the same. I would add a caveat to make it a little more believable and accurate. The most advantaged group in the tax code is the INFORMED business owner. If you feel encumbered by the tax code and business laws, and dont see too many breaks coming your way, its because you fall into the unfortunate group called the UNINFORMED business owners!
So, how do you become one of these favored informed business owners so you can start to see these benefits come your way? The answer is strategic tax planning. Or better yet, you need to find a professional that can provide you with comprehensive, strategic tax planning. To define it, let me first tell you what its NOT.
Strategic Tax Planning is NOT:
- Tax Compliance - Tax compliance is a necessary evil. Preparing financial statements, filing tax returns, making estimated payments, and so on, is tax compliance. It is a very necessary service, but takes more dollars out of your pocket than what it puts into your pocket. I like to think of tax compliance as the scorekeeper of the football game. Keeping score as the game progresses. But if your team is losing big on any given Sunday - Do you get mad at the scorekeeper? No! And please dont get mad at your scorekeeper / accountant, they are doing exactly what you pay them to do. Tax planning, on the other hand, is the coach that formulates the game plan and develops the strategies throughout the year. Are you and your business missing this planning function?
- The Big Three Tax Ideas - This is my nickname for three practices that sometimes give business owners a bad impression of tax planning. The Big Three are again NOT tax planning. The Big Three are:
- Buying Equipment solely for the "write-off" - if you need the equipment great. Buying equipment in the most tax advantaged manner is wise, but I have seen too many garages and warehouses full of new, unused equipment. If the equipment is not going to make you money today, dont buy it. Does it make business sense to spend $100 to get a $30 deduction? No!
- Paying yourself a bonus to pay your taxes. You are actually increasing your taxes (payroll and income) to pay the tax. Again the idea with tax planning is to REDUCE your tax.
- Writing off obsolete inventory - If you have obsolete inventory, great, write it off. But again, this is not tax planning.
- End of the Year Ideas - "Wow, Mr. or Ms. Business Owner, youve had a great year or worse yet great last year - you owe a lot of tax." "What Can I do?" "Well you made money so you will simply have to pay a lot of tax!" If this sounds familiar you know this is not tax planning. Tax planning cannot simply be performed at the end of the year or the beginning of the next year. Regardless of when the taxes are actually filed, the facts that determine how much tax you pay are history at that point.
- Showing Zero Income - Tax planning is not a matter of the questionable and risky process of wiping out the income "on the books" to pay no tax. This practice severely reduces the value of your business, your ability to get financing without personal guarantees, and your ability to get bonding. The big companies do tax planning while showing a profit and providing shareholder value and return. They need to show the biggest profit possible while reducing one of their biggest expenses - taxes.
- Im Getting a Refund - Please, once and for all, getting a refund is not a good thing. It doesnt mean you didnt pay tax - it means you gave the government an interest free loan. And since the government is unlikely to give you an interest free loan, dont give one to them. You need to look at the payroll and income taxes that you and your business are paying. For cash flow purposes, you want to pay your taxes timely, but as late in the game as possible.
What Strategic Tax Planning IS:
- Entity Structure Planning - Create the optimal entity structure for your business and you personally to maximize your tax benefits and legal asset protection benefits.
- Compensation and Benefit Planning - Develop strategies that meet your personal and business short and long goals and objectives. Its really about minimizing taxes and out of pocket expenses paid with after tax dollars. The goal is maximize your income and the amount available to the business by minimizing your taxes across the board
- Maximize Advanced Retirement Planning and Income Deferral Opportunities - Business owners must annually capitalize on techniques to maximize monies and continued income streams available for life after the business.
- Utilize Succession, Exit Strategy, and Estate Planning Opportunities - Remember, when you exit your business, it will be a taxable event. Develop a plan to minimize taxes on the transfer to ensure you walk away with as much money as possible.
- Avoid or Eliminate Questionable or "Grey Area" Tax Planning Strategies to reduce Audit Risk - All your tax planning strategies should be supported by the black and white language of the IRS Tax Code and Regulations. For the informed business owner many opportunities exist.
Think About It..... The Need for Tax Planning!
Your business is an S-Corporation to avoid corporate level tax. The business earns $100.00. To put that in your pocket, you must pay employee and employer level payroll tax-15.3%. Your remaining $85.00 is then subject to your personal tax rate-35%. You now have $55.00 in your pocket. Do you dare spend it and reduce it further with sales tax? No, you decide to save it. If you die with that $55.00 in your pocket, the estate tax can tax an additional 45% from you and your surviving family members. You now pass on $30.00 to your family after passing $70.00 to the government in the form of taxes.