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Tax Planning is More Than Making Estimated Payments
There is a popular misconception that tax planning for small and medium-sized businesses is simply figuring out how much tax will be owed and making estimated payments. But those are just tax projections.
True tax planning is looking at the life span of a business and asking where it is today in terms of growth and profitability, where it has been in the recent past and where it is going based on current projections.
What goals do the owners have? In the long term, do they want to position the business to sell, to expand into new markets, or transition to family members who will drive the business into the next generation?
“Tax planning” may, in fact, be a misnomer because tax planning is very much like strategic planning, but with a unique goal.
Tax planning specifically looks at how tax laws can be used as a tool to help business owners pay the least amount of dollars in taxes over the lifetime of a business, not just quarter by quarter.
Unlike larger corporations that may have entire departments dedicated to tax strategies, small and medium-sized businesses (SMBs) often operate with limited resources and personnel. Thus, it is important to understand and implement effective tax planning with the help of trusted advisors to ensure the long-term financial health of your business.
What are Tax Planning Strategies
Tax planning involves analyzing a business’s financial situation with the aim of maximizing tax efficiency while ensuring compliance with current laws and regulations. It encompasses a range of activities, including choosing the right business structure, optimizing deductions and strategically timing income and expenditures to best optimize tax brackets over multiple years.
Strategies for tax planning depend heavily on where a business is in its lifecycle.
For example:
· A young startup company may be pre-revenue with a promising new product that is just beginning to take off. While its taxes are low now, the prospect of a steep climb in sales over the next two years could mean a heavy tax bill at a time when the company is still vulnerable. With tax planning, the company can plan now to utilize deductions and credits they may have been unaware of, as well as net operating loss carryforwards that could tame future tax bills.
For young companies and mature companies alike, the choice of business structure — whether a sole proprietorship, partnership, limited liability company (LLC) or corporation — has profound tax implications. Each structure is taxed differently and comes with its own set of regulations. Effective tax planning involves evaluating the potential benefits and drawbacks of each structure to determine which is most advantageous for the business’s situation. For instance, an LLC may provide liability protection while allowing profits to be passed through to owners without facing double taxation, unlike a C corporation.
Cash Flow Management
One of the most significant benefits of tax planning is its role in enhancing financial stability. For SMBs, cash flow is the lifeblood of operations. By strategically planning taxes, businesses can improve cash flow management. For example, by timing income recognition and deductible expenses, businesses can minimize taxable income in a given year, thus reducing the immediate tax burden. This can free up cash for reinvestment in the business, pay down debts or handle unforeseen expenses.
It’s important to remember that tax planning is a long game.
The purpose is to ensure the financial health of the company well into the future. That may result in some decisions that business owners may be uncomfortable with in the short term; specifically realizing that minimizing tax this year does not always result in the lowest tax expense over time – it may be best to pay more this year in order to maximize a low tax bracket.
For many SMBs, growth is a primary objective. However, rapid expansion can lead to complex tax situations. Tax planning allows businesses to anticipate and prepare for these complexities. The lowest tax a CPA can get for you is not necessarily the best. There may be a reason to pay more taxes. You don’t want to leave money on the table by dropping into the 12% bracket when you know you will be in the 37% bracket next year. Evening out those bumps results in a smoother, more predictable financial picture for your company.
Challenges in Today’s Tax Planning Environment
Certain challenges are impacting tax planning for SMB owners these days due to the uncertainty around what will happen to the federal estate tax exclusion at the end of 2025. Some business owners will be significantly affected. Also, the current interest rate environment is unpredictable. High rates are slowly giving way to reductions, but whether those reductions will be continued is a guess right now.
Additionally, many business owners are vexed these days by delays in receiving K-1 forms that are necessary for filing taxes. It’s important to note that your tax planning advisor will ensure your taxes – including estimates for the current year – are paid on time so you can delay filing your returns until after the deadline, when you are more likely to have K-1 forms and other necessary documents.
Business owners must plan for what is known right now and be flexible enough to revisit their tax planning strategies on a regular basis to make adjustments as needed.
Adams Brown CPAs typically check in with business owners on a quarterly basis to discuss tax plans and to learn what is new in the company that may necessitate a change in the plan.
Adams Brown goes beyond just tax planning. We’re a holistic advisory firm, which means we’re here to help with the big picture – from managing your personal financial planning to providing managed IT services. Our team works together to make sure every aspect of your business life is covered.
If you would like to discuss tax planning or other business needs, contact an Adams Brown tax advisor at adamsbrowncpa.com/contact.
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