In a 2001 tax court case, a family-owned junkyard was tried for deducting cat food off their business taxes. They classified this expense under Section 162 as an “ordinary and necessary” expense. They ended up winning the case since the cat food brought in stray cats which scared off the snakes and rats off the property. Therefore, it was ruled as a necessary business expense to keep their business clear of rodents. Now you may not be a junkyard owner or anywhere near this type of situation, but as a business owner it is essential to create a tax plan that saves you the most money and maximizes your deductibles. Being prepared and knowledgeable of tax laws and deductibles makes you not only smart but increases your chance at success.
Tax Planning Objectives:
Tax planning is the act of analyzing your profits and tax liability in the pursuit of saving greatly on your taxes during tax season. Our country has plenty of tax laws to dish out. However, it is not impossible to minimize tax liability and maximize deductions while staying within the legal and ethical boundaries. Planning is essential to every part of owning a business, and taxes are no different. With a well thought tax plan, any business owner can quickly use their income in the best and most productive way for their ultimate business goals. As a business owner, you already know you must pay taxes when tax season comes around, tax planning also raises your awareness of this and reminds you to put money away during the fiscal year, rather than straining to collect it all last minute. This will reduce stress and make you better prepared financially. With this increased awareness, you will also be able to quickly spot and resolve potential problems that may lead to future litigation. The overall objective of business tax planning is to ensure that your short-term and long-term goals are met, you are in compliance with the IRS, and that every tax year is as stress free as possible.
Choosing an entity:
So, what types of businesses benefit from a well thought out tax plan? The answer is all businesses! Small and large corporations both benefit greatly from planning properly. For example, businesses can benefit in different ways depending on what type of business entity election has been made. For example, sole proprietorships are disregarded for federal tax purposes and reported as part of your individual tax return. Therefore, the profits of the business are taxed at the same rate as your other income, and you must also pay self-employment tax on those profits. Partnerships or an S-Corps are known as “pass-through” entities, meaning that these businesses do not pay federal taxes at an entity level. The term “pass-through” is coined to signify that the income or loss passes through to the business owner(s) and is filed on their personal tax return. The profits of a partnership are taxed similarly to the way sole proprietorships are taxed. While the profits of S-Corps are taxed slightly different and under current tax laws are possibly a more advantageous option. Another entity type is the C-Corp, this business type pays tax at the entity level. It can also be advantageous to be taxed in this way, as the rates are usually less than individual tax rates. The downside to a C-Corp is that when owners receive payment, those payments are also taxed. Tax planning in general will help you decide which entity type is the best for your business and ensure that you are properly planning for restructuring if necessary.
Advantages:
There are advantages to business tax planning beyond how you are taxed as an entity. Business tax planning saves you time in the future, allows a plan for the timing of income and expenses, helps to plan for big purchases, and limits your tax liability.
Let’s dive into how tax planning saves you time in the future. Time is something every business owner wants to spend sparingly. Creating a work life balance is crucial to attaining a happy, yet successful business life. No smart business owner wastes time. Therefore, tax planning is essential to these types of people. Business tax planning allows a business owner to predict their potential income and liabilities so that they do not need to worry about planning as they go. Planning in general, raises your awareness of what must be done so that you don’t get hung up on the details at a time when it is inconvenient. Business tax planning also helps to plan for income changes and big purchases. By understanding your current financial standing, you are also able to plan for future profit changes and unexpected purchases that come up. With tax planning being a priority, you will always know what your finances look like and therefore are always prepared to make new financial moves. Finally, tax planning limits your liability. All business owners wish to reduce their liability and prevent future litigation. Tax planning raises your awareness of the current laws and allows you more comfort when making decisions. An educated decision is always better than an ill informed one. However, don’t feel that you must learn all of this by yourself. Accountants work with business owners to clarify information that is difficult to understand and provide insight into the best moves for them personally. Asking an accountant before making big decisions is not only smart, but dire to prevent future litigation and misunderstanding.
Common mistakes when tax planning:
Business tax planning is essential to running a smooth operation. The most common mistakes when tax planning stem from rushing the planning process.
These mistakes include:
- Choosing the wrong type of business structure:
Seek professional advice when you are wondering about what type of structure will save you the most money. Moving to a partnership, S-Corp, or C-Corp is a big decision and there are costs associated with this election. Asking an accountant will ensure that you choose the entity type most suited to your business needs.
- Waiting until taxes are due to Book keep:
Bookkeeping is essential even when its not tax season. Keeping records now, will make you better prepared when tax season does come around.
- Getting behind on payments:
Tax planning helps you stay prepared, but ultimately it is your responsibility to handle payments in a timely manner. Therefore, tax planning must be done in a detailed fashion. This anticipation and awareness will ensure that you don’t get behind.
- Missing out on deductions and other tax benefits:
Knowing the playing field will make you more inclined to make smart decisions regarding the current tax laws and how you can personally benefit from them. Tax planning, when done right, benefits you and saves you money. It’s a win-win!
Conclusion:
Business tax planning may take a little more time out of your already busy schedule. However, using your time wisely will save the pain of spending inconvenient time and money in the future. If you are a business owner, then there is no reason why you should brush off the importance of tax planning. As always, you don’t have to do it alone. Access Tax and Accounting provides quality assistance to help you be better prepared. Our accountant cares about your financial health and will strive to give you the clarity you deserve. Access tax and accounting provides business tax planning assistance in the following areas 75904, 75949, 77069, 77701, 77042, 75701, 75702, 75001, 77004, 76006, 76039, 75038, 75961, 77375, 77086, 77377, 77066, 75652, 77429, 77433, 77035, 77386, 77449, 77088, 77304, 77379, 75071, 76040, 77027, 77070, 77381, 77351.
