Imagine discovering just days before the tax deadline that you've missed out on thousands in deductions, overpaid estimated taxes, or failed to leverage a credit that could have boosted your profits. This scenario is common for business owners who view taxes as an annual chore. The reality is that strategic, year-round tax planning significantly enhances your financial health.
Here’s why proactive, continuous tax planning should be central to your business strategy:
- Maximize Deductions and Credits
The government is constantly making changes to the tax code. What was once deductible one year may not be the next. In this ever-changing world, you must understand what deductions and credits are available that may benefit your business now and in the future. Waiting until the end of the year to hunt for deductions and credits frequently leads to missed opportunities.
Deduction Example: Including tax planning in your strategic business plan can help determine the best time to purchase or replace equipment.
The passage of the Tax Cuts and Jobs Act in 2017 changed the rules for bonus depreciation, allowing companies to expense 100% of qualified assets in the year of purchase. Beginning in 2023, the bonus amount is reduced by 20% yearly and will be completely phased out by 2027.
If you purchased $100,000 worth of equipment in 2022, you could use bonus depreciation to deduct the full amount. If you wait until 2026, your bonus depreciation is reduced to 40%, thus reducing your deduction to $40,000.
Credit Example: We usually associate having a retirement plan with allowing us to defer a portion of our income and reduce our taxes today. However, creating a retirement plan can be time-consuming and expensive for small business owners.
The Small Employer Pension Plan Startup Cost Credit can help offset these costs. Businesses with 100 or fewer employees can claim up to $5,000 annually for the first three years to offset the costs of setting up retirement plans like 401(k)s or SIMPLE IRAs. Additional credits apply for automatic enrollment features.
- Improve Cash Flow Management
Proactive tax planning provides a clearer understanding of tax liabilities, allowing for more accurate financial and cash flow forecasting. This prevents unexpected year-end tax bills, improving cash flow stability and financial decision-making. Here are a few ways tax planning can improve cash flow:
- Accurately estimated quarterly tax payments help avoid large, unexpected year-end bills. Nobody likes a surprise tax bill!
- Regularly setting aside funds for anticipated taxes prevents cash flow disruptions when tax payments are due.
- Utilizing tax credits and incentives can directly reduce tax payments. For instance, credits for research and development or energy-efficient investments can lower tax obligations, freeing up cash for other business needs.
- Stay Up to Date with Tax Law and Changes
As said before, tax laws are constantly changing. Plus, as your business grows, you may expand outside your local area, into various states, or even internationally. Planning can ensure compliance and help capitalize on emerging opportunities. For example:
- Changes in your entity structure could allow you to take advantage of new tax legislation, yielding potential savings.
- State and local governments frequently offer incentives for increased jobs and capital investments.
- Doing business in multiple states can lead to a long list of additional compliance issues. Income, sales, and employment tax laws vary, and you may be subject to these laws even if you are not physically located there.
- Plan for the Exit
Tax planning isn't just about immediate savings; it can also affect your long-term financial health, estate planning, wealth preservation, and exit strategy. For example:
- The sale or gift of a business to family members can trigger various gift or estate taxes. However, these taxes can be minimized by planning many years in advance.
- How a company is sold (asset sale versus stock sale) can significantly affect the tax rate paid on any gain. Tax rates can also vary based on the type of assets being sold.
- The unpredictability of future tax rates and exemptions can influence the timing of an exit. Tax changes must be monitored so you take advantage of favorable tax provisions before they expire or are reduced.
Getting Help
Navigating the complexities of tax law requires expertise and constant attention; something most business owners don't have the time or resources to handle alone. Partnering with a tax professional ensures your business stays ahead of changing tax regulations, identifies new savings opportunities, and avoids costly mistakes.
However, please note that there is a difference between tax preparation and tax planning. Typically, a tax professional will charge an additional fee for tax planning. Be sure to clarify this detail with the tax professional before you finalize your service agreement.
Treating tax planning as an integral, ongoing part of your business strategy, all year long, allows you to make informed decisions, better predict financial outcomes, and maintain compliance. Integrating tax planning throughout the year positions your business for sustained success and longevity in an ever-changing financial landscape. Best of all, you will not be surprised on tax day.
The Author
Steve Weldon is a distinguished Partner at the Florida CFO Group. He is a strategic advisor who helps SMBs achieve financial clarity and sustainable growth. With a background in private equity, public companies, and venture capital, Steve has developed a proven track record of turning challenges into opportunities. Whether navigating a complex turnaround, preparing for an IPO, or optimizing cash flow and profitability, Steve's goal is to empower businesses to reach their full potential. He simplifies the complexities of finance, ensuring clients feel confident and equipped to make strategic decisions. Connect with Steve on LinkedIn.
Contact Us
If you have any questions or would like to discuss your organization’s finance and strategic management needs, please call the Florida CFO Group at 1-877-352-2367 or send us a message. We are here to help you navigate your financial challenges and achieve success.