It’s essential to consider tax planning and cash flow management long before April 15th rolls around. So, f you’re paying for tax planning, then your Certified Public Accountant (CPA) firm should have already scheduled a monthly or quarterly meeting with you and your team. Effective tax planning is year-round tax planning. Let me explain.
First, we need to get simple and take a second look at the word “planning.” For what are we planning? We’re not planning for this year’s tax return, nor next year’s tax return, nor the year after that one, and so on. We’re planning for your retirement and ultimately, if we intend to deal with matters relating to financial well-being candidly, we’re also planning to maximize the impact of your life and legacy on your children and grandchildren.
Let’s bring your attention back to the basics.
I would like to bring your attention back to the activities you and your CPA firm’s team should be engaged in from December 31st to April 15th if, indeed, someone is taking accountability for short and long-term tax planning and actively working to reduce your tax burden. Today’s article is not a complete and exhaustive business and personal tax liability article. It’s a thought piece. .
I’ll examine a select set of considerations that must be acknowledged, assessed, and addressed for proper tax planning and provide an example of how quickly business owners can fall behind. If the scenario at the end feels like a scare tactic, that’s because it is.
What happens at the first post-tax season meeting?
We’re going to sit down and examine multiple years of tax returns. We’ll focus particularly on last year’s return. Here are the questions me and my team will bring to a client:
- What happened last year?
- What opportunities did we identify and act on, and what opportunities were missed?
- Do you understand why your tax bill is the amount it is?
- Are there any anticipated or possible changes within the year that I should know about?
- Have you adjusted your long-term goals or plan to adjust those goals this year?
Now, it’s important for my team to ask the client if they are happy with the performance of the firm, but what does performance mean in the context of a long-term tax planning relationship?
Is your CPA firm underperforming or overperforming on your tax planning?
In some cases, clients are going to say, “Yes, but here’s something I’d like to talk about.” That’s a constructive place to start a conversation. In other cases, a client may look at the cost of tax planning, look at their tax bill, and ask, “Where is my money going here?”
Here’s the simple answer: If I can point to questions one through five above and explain in detail what I did last year to address each area, then it’s likely I’m trying. On the other hand, if you told me, “I’m selling a commercial property,” and I failed to talk to you about a 1031 exchange, then yes, I’m underperforming.
All that being said, there is exactly a zero percent chance that a tax preparation and compliance firm is going to talk to you about the tax burden associated with a real estate sale.
How much do business owners need to know to participate in year-round tax planning?
Business owners learn fast, so education is part of the process of year-round tax planning. To make year-round tax planning work, CPA firms need to sit down with business owners and give them a general, conceptual understanding of what’s happening.
Do they need to know all the latest information on opportunities, credits, deductions, and tax law changes? No, they just need to tell us everything about their business.
Goal-setting outside of tax season is critical to success.
Consider setting goals at the beginning of the year. One example is increasing contributions to your business and personal retirement plans. Unforeseen course changes like these can significantly affect your tax situation, such as placing you in a higher tax bracket, disqualifying you from valuable tax credits, reducing or eliminating your ability to benefit from contributing to IRAs or Roth IRAs, or even possibly increasing your future Medicare premiums.
Keep CPAs up-to-date on short-term goals, as well.
A few scenarios: You’re thinking about sending your teenager to a college preparatory school, or you’re considering purchasing a new home.
Well, how can we increase contributions to your retirement and buy a new house when we’re not expecting corresponding growth in business revenue? Increasing distributions might put your business in a vulnerable position with respect to cash flow.
How do we make sure that your business and personal cash flow are going to support this short-term change? We get to work. Your CPA firm simply knowing your plans and goals is half the battle.
For year-round tax planning, stay organized and keep impeccable records.
The simplest and easiest of tasks, record-keeping, is critical to success. As your CPA, I’m going to have my team working with the numbers that we see and maintaining documentation that is thorough and organized, from accounting and tax documents to financial and operational records.
If your business is growing and you do not have a CPA firm working with you to maintain your records, I recommend keeping records in one place or in one software. And keep your receipts.
Record-keeping is financial and operational.
If you’re considering tax planning or you’re engaged in tax planning currently, it’s likely that whoever’s handling that is an external team at a CPA firm. In our clients’ case, we maintain a bookkeeping and accounting system that’s updated and examined monthly, quarterly, and yearly with account reconciliation and all the rest of it. Recurring expenses and revenue are recorded, classified, and accounted for properly, as well as any expenses that you log in QuickBooks Online.
We know about what you’ve told us, what we may be forecasting, and what we see your bookkeeping software.
But what about, say, an internal plan to start doing leadership retreats every quarter? That would be recorded as meeting minutes. You have four people on the executive team, and the plan is to go to a hotel or resort and think about the big picture. If that news gets to anyone on my team, we’re going to say, wait, why don’t you host the retreats at your home and use the Augusta rule? You have a nice home near downtown. That’s $800/per night for up to 14 days.
The point of year-round tax planning is to keep your CPA and his team in the loop; that’s the type of relationship we want because we have a complex tax code, and we look into every last corner of it for savings because savings add up.
Does this business owner sound like you?
Let’s think about a business owner who’s been doing a fantastic job with sales and strategy for five years. He’s frugal and keeps expenses to a minimum. Revenue is up; transactions have increased five-fold; the workforce has doubled, and transactions are getting increasingly complex. He’s put his money to work in the market but shied away from taking on the costs associated with a wealth management firm. On the tax side, he works with a large firm that provides preparation and compliance only.
It’s easy to succeed and fall behind at the same time.
Everything is looking great, right? Well, we don’t know that. It could be looking so, so much better in relation to the time, effort, and stress he’s experienced in the process of building this company.
First, he’s lost hundreds of thousands of dollars to the IRS in missed deductions. On the investment side, there’s no one steering that ship.
The optimal setup would involve a CPA firm and wealth management partners reviewing those investments. When he starts to think about retirement and considers withdrawing money, appreciated investments and contributions to pre-tax IRAs have serious tax implications. Capital gains taxes become a significant concern.
Is it fixable? No, we cannot rewind the clock. Is it the end of the world? Again, not quite. We can make the best of the situation. We start the tax planning process right when he walks into the office on Jan. 1st.
Let’s get to work.
Schedule a discovery call. We can start tax planning today.
Talk soon,
Jeremy A. Johnson, CPA