Tax planning is a prerequisite for growth for any small business with rapid-growth potential. Why? For two reasons: First, tax planning lowers what you pay in taxes. Second, tax planning is a major pillar in any coherent growth plan
Tax planning reduces uncertainty and reveals opportunity. How?
In the simplest sense, tax planning aligns all financial functions for the purpose of reducing taxes. It also provides a reliable forecast of tax expenses now and in the future. This frees managers and directors to focus on non-deductible business expenses that must be reduced or covered by increased revenue.
A Necessary Step For Growth-Driven Companies
Accurately and diligently paying taxes is not tax planning, nor is tax preparation. Unless your business has conducted an analysis of all its finances from a tax perspective, you’re not tax planning.
Your business may have missed significant opportunities, including operational goals and financial gains. Mature companies won’t miss these opportunities, so tax strategy and planning must be taken seriously by growing companies that want to compete.
What is Tax Planning?
Effective tax planning requires knowledge of business operations, a deep understanding of finance, and a proactive mentality. It requires mastery of the established tax codes and knowledge of the latest regulatory requirements.
For an essential view of tax planning, we can break it down into steps and outcomes:
Tax planning is:
- Analysis of a business’s finances;
- Arrangement of a business’s finances; and
- A strategic plan that allows all elements to function together to maximize tax efficiency, so that your business pays the lowest taxes possible under the law.
Tax planning involves:
- Applying Deductions
- Choosing Business Structure
- Protecting Assets
- Further Allowances, Exclusions, Exemptions, and Loopholes
While everyone can benefit from tax planning, it’s particularly important for growth-stage businesses. These are businesses that are driving sales and rapidly collecting more revenue; they need to make sure that it’s being allocated efficiently.
Here are 6 signs that you’ve reached that next step, where it’s time for your business to take an in-depth look at its tax planning.
1. Waiting Until the End of the Year to Begin Taxes
For many businesses, paying taxes is a lot like cramming for an exam. They wait until April 15th looms and then scramble to get everything done in time. While it might be possible to survive this way short term, growth-stage businesses should not take this approach.
If you want to take full advantage of all the money-saving strategies at your disposal, you need to stay on top of your taxes throughout the year.
Almost every financial decision that you make will have an effect on your tax obligations. By taking a monthly (or even more frequently) look at sales and expenses, you’ll have a better understanding of all your opportunities to save and reduce the risk that you’ll make a mistake.
2. Not Taking Full Advantage of Deductions and Credits
Tax deductions and credits are meant to be used. If you overlook common deductions like travel and food expenses and miss out on small business health care tax credits, you’ll end up paying more in taxes than you have to. That’s wasted money—a costly and unnecessary charitable donation to the federal government.
The sheer number of deductions and credits makes it difficult to account for them all without robust tax planning. But for a few examples, you can deduct:
- Advertising costs
- Bank fees
- Depreciation costs of your business’s equipment and furniture
And you can get tax credits for:
- Purchasing an alternative fuel source vehicle
- Making your office accessible to people with disabilities
- Research and development. That can mean the cost of performing a study, or even just improving the quality of your product.
Most deductions and credits are unlikely to change. But keep in mind that some deductions and credits will change or even disappear. Tax strategy requires maintenance which means that tax plans are flexible to change and include close attention to shifting regulatory requirements.
One business may receive a comprehensive tax plan and use it successfully for years with only minor adjustments. Another business may require frequent alterations, especially in volatile industries.
3. Your Business Has Moved From Start-Up to Growth-Stage
As mentioned at the top, if you’ve exited the startup phase of your business and moved to the growth-stage, a more comprehensive tax strategy is required.
As your company enters a growth-stage, tax planning will provide new opportunities to reduce your tax burden, as well as reliable information to increase the quality of executive decision-making.
Major tax implications accompany the following: A dramatic expansion of your business’s workforce, offering larger performance incentives, acquiring another company, or expanding out of state.
Notice that functions that previously belonged to human resources, operations, or company directors now require scrutiny from a tax perspective.
Changing Business Structure, From LLC to S Corp
The growth stage is also a great time to evaluate your business structure. For example, while it generally makes sense for a small business to start out as an LLC, there comes a time, usually marked by a certain yearly revenue, that restructuring as an S Corp becomes beneficial for tax savings.
Keep in mind that your business entity structure dictates when business taxes are due each tax year, so business entity is just as much a practical matter as a high-level strategy.
A solid tax plan from a competent CPA will give clear direction for decision-making that maximizes tax efficiency.
4. Your Business Has Hit Break-Even Point
When revenue equals costs, your business has found its break-even point—It neither takes a loss nor makes a profit.
Growth is now a matter of choosing correctly between increasing prices or cutting expenses. Tax planning is crucial at this stage because it gives you a clear picture of what your business spends on taxes now and what your business might spend in the future.
So, in the “increase prices” vs. “cut expenses” debate, a comprehensive tax plan will help your business make informed decisions about how best to achieve growth.
A good tax plan makes for a great growth plan.
5. You’re Concerned About Compliance
As you know, the tax code is long and complicated and changes frequently. Since it’s in such constant flux, it’s important for businesses that are looking to grow that they stay fully on top of local, state, and federal laws.
If you have any concerns that your business is at risk of being out of compliance, comprehensive tax planning will allow you to focus your energy elsewhere.
Compliance also goes hand in hand with your tax burden. Minimizing your taxes, while staying compliant with all laws and codes, can be done with diligent planning.
6. You Want to Offer More Employee Benefits
Employee wages, commissions, and bonuses are tax-deductible. So are benefits. If you aren’t offering employee benefits or are offering only bare-bones benefits, your business is missing out. Benefits are key for attracting the talent you need to stay competitive and grow your business.
Depending on the size of your business, your tax strategy may call for an increase in employee benefits as tax-deductible substitutes for wage increases. Benefits-related deductions and credits are numerous.
Employee discounts, for example, are tax-deductible. So are paid vacations, among other benefits. And employers may be eligible for tax credits if they cover healthcare-related expenses. For example, the Employer Credit for Paid Family Medical Leave and Small Business Health Care Tax Credit I mentioned earlier are just two of many, many credits available to eligible businesses.
If you need help with comprehensive tax planning, call Jeremy A. Johnson, CPA P.C. at 682.224.3243 or schedule an appointment on our website.