As a business owner or entrepreneur, you might not have anticipated the economic and time-consuming burden tax obligations would have on you. Without being aware, you may have foregone the benefits of careful tax planning for small businesses and missed out on significant deductions or credits. After all, you were preoccupied with growing your business, executing business plans, improving operations, and solidifying your place in the industry.
Inevitably, however, you have since then encountered the reality of tax obligations and compliance and seen just how crucial it is to maximizing your revenue and remaining in operation. While there is no escape from taxes, careful tax planning is a necessary part of a business’s arsenal, as it serves as a necessary defense and offensive strategy.
What Role Should Tax Planning Play in My Operations?
A big one.
Taxes are a large expense that all companies, from LLCs to corporations, must contend with. Seeking to reduce this obligation while paying the “fair share” is a big part of navigating the sea of tax requirements. Depending on the state and the kind of business you’re running, your situation will be distinctly unique.
Don’t let taxes become a barrier or hindrance to your growth or profitability. Engage in tax planning that seeks to make use of rebates, charge-backs, deductions, exemptions, and other benefits.
Companies must engage in a persistent and strategic balancing act when it comes to spending, hiring, investing, taxes, and risk oversight. Tax planning is more than just hiring a CPA once a year to file your taxes, it’s about maximizing expenditures, taking advantage of tax exemptions and credits, and remaining in compliance with federal and state tax codes.
As Harvard Business Review reports, a company’s balancing act of risk and reward in tax planning comes from constant assessment and analysis of enterprise risk management—understanding your company’s unique circumstances and structure, factoring in retirement plans, insurance plans, and more.
Avoid Tax Penalties and Maintain Public Trust
Big players in the U.S. market like Microsoft and Hewlett-Packard have faced public scrutiny for tax avoidance. Not only is this a problem with the IRS, but it also leads to public loss of trust.
So while tax minimization is part of a company’s tax plan, crossing the line into non-compliant territory comes with its fair share of adverse outcomes such as IRS fines, damage to reputation, and a loss of revenue. It’s why working with a tax professional is a must.
4 Strategies to Help Your Business with Tax Planning
Reducing tax liability is a moving target.
As business transactions become more complicated, the complexity of tax liability laws increases as well. Businesses have a lot to consider, especially if they conduct business across multiple jurisdictions. Many tax-saving opportunities are temporary or cycle out as new administrations come in, so it makes it exceedingly difficult for business owners to steep themselves in these complicated codes.
Tax planning is a tailored approach to your business situation, so these tips are general considerations. For individualized tax advice, call one of our tax professionals and tax consultants to dive into your questions.
#1 Consider or Reconsider Your Tax Structure
The U.S. code allows businesses to structure their operations in several ways and each offers different benefits and incentives. Companies outgrow their tax structure all the time depending on growth and revenue expansion, so assessing whether changing your tax structure is necessary might help come tax season.
# 2 Explore all of the Tax Credits & Deductions Available
Tax credits and deductions are not stagnant. They ebb and flow depending on who’s calling the shots, economic turmoil, federal policies, etc. A company can pursue tax benefits and reduction of liability in different ways. Tax credits may become available to business owners that vary each year. Also, businesses can look into employee benefit plans and investments that provide tax deductions.
#3 Using Inventory Valuation Methods
Choosing the right method for inventory valuation can have an impact on tax savings at the end of the year. The different inventory valuation methods vary on how your company does business and how inventory is bought and sold. The two methods, FIFO and LIFO (first-in, first-out method, and last-in-first-out method respectively) can help companies save money in times of rising costs or periods of inflation.
#4 Equipment Purchases
The IRS code Section 179 businesses are allowed to deduct a certain amount in equipment purchases throughout the year the purchases are made. Businesses can benefit from increasing their deductions in any given year, which reduces their taxable income. The purchases can be timed to happen towards the end of the year and still be deductible for that year.
Bonus: Find a CPA that Understands Your State’s Code
In California, for example (where we are headquartered), the state is known to have higher tax rates than other states but also offers other benefits. In 2019, small businesses made up 99.8% of all businesses within the state. Tax compliance shifts constantly, as the state seems to favor experimentation with regulations and that makes filing taxes as a California business tricky.
Maximize Your Resources, Revenue, and Time with Professional Tax Planning
Tax obligations are not just an annual preoccupation if you own a business. Whether you live in California or any other state in the Union, or whether you live abroad and operate a U.S.-based business, taxes are interconnected with your day-t0-day operations. Make the most of it by protecting your revenue, staying in compliance with the law, and improving the lives of your employees. Talk with a tax planning expert at AB Tawil and learn about what we can do for you.
Ready to tackle the year with tax planning strategies that will set you up for success come tax season? Connect with us today.