Tax planning is an integral part of a company’s financial plan. Strategic tax planning involves utilizing the current tax regulations to minimize the taxpayer’s tax liability. The challenge for many companies, especially for those who run a small business, is that they do not think about their tax situation throughout the year—until it's time to file their tax returns.
Company decision makers should be consulting with their tax professionals throughout the year in order to understand the tax implications that could result from making certain financial decisions, prior to signing off on them.
Part of the Team
An experienced tax professional will acquire information from an array of sources to determine the best course of action for a company. When choosing a tax professional, it is recommended to identify one who is not only well-versed in the current tax regulations, but has knowledge from previous years as well as a solid research system.
As tax regulations get introduced and phased out, the ability to identify which regulations are applicable to the year in question can mean the difference between paying minimal or no taxes to paying huge taxes.
It is important to remember, a tax professional is a crucial part of a company’s team. They operate with other members of the organization, including some or all of the following: CEO, CFO, COO, Managers, etc.
In addition to the tax code, your tax professional will need documentation from the company. Some of the documents used in the tax planning include a company’s strategic plan, as well as the current year's financial documents, and company-sponsored retirement plan documents.
Minimizing Liability
The primary reason for tax planning is to minimize a company’s tax liability. A company will incur tax liability based on its corporate entity structure. At the federal level, C corporations pay taxes based on the profit the company earns. Sub-chapter S Corporations, partnerships Limited Liability Companies (LLCs) are pass-through entities. A pass-thorough entity passes profits and losses to the shareholders, and these entities may have less tax liability, or none at all.
In addition to the federal tax law, businesses may be subject to State and Local authority business tax laws. Some of these laws impose a minimum tax amount for all companies or companies of a certain entity, while other governmental agencies may impose a tax which is based on revenue.
Minimizing a company’s tax liability can increase the amount of cash available. That cash can be used to support the activities in the company’s strategic plan, which in turn support its growth plan. Minimizing a company’s tax liability can involve taking advantage of tax credits at the Federal, State, and Local government agencies. A tax credit is an amount of money you can subtract from the tax liability. It is a financial benefit provided by a governmental agency.
Tax planning can result in the ability of a company to avoid tax penalties. A tax penalty can be imposed as a result of not paying estimated or actual taxes due, or not paying by the due date. While there are some due dates that remain consistent over time, new due dates are intermittently introduced whenever new taxes are imposed.
Turn to an Expert
It's important for business owners to know about new tax laws that are applicable to them, and how the liability is calculated. It's crucial to keep track of the all-important due dates, as well as the fines that could be associated with not filing returns on time, or for not paying taxes when they are due.
If all of this sounds a little complex, there's a simple solution. Consult a tax expert who will gather the relevant information, answer all your questions, and prepare a strategic tax plan on your company's behalf. Tax time doesn’t need to be stressful once you have a solid plan.
Founder and CEO of LEK Management Inc., Lynn Karam has two decades of experience in finance, operations, and strategic planning. Karam is an Enrolled Agent authorized by the United States Department of the Treasury to represent clients who are undergoing an audit and to negotiate with the IRS on her clients’ behalf. Her success rate in resolving even the most challenging of IRS scenarios has become the cornerstone of her success. As CEO, Karam uses her financial expertise to establish sustainable strategies that result in significant business growth for her clients.