Tax planning is an important part of what happens at the end of the year when your business files your tax return. Throughout the year decision are made regarding the business and if made right can save you taxes.
What is Tax Planning?
Small business tax planning is looking at various tax options in order to determine how to conduct business and personal transactions so that taxes are eliminated or considerably reduced.
Usually business don’t think about planning until they are going to meet their accountant, but tax planning is an ongoing process, and good tax advice is a very valuable commodity. You should review your income and expenses monthly, and meet with your CPA or tax advisor quarterly to analyze how you can take full advantage of the provisions, credits and deductions that are legally available to you and changing all the time, especially with this economy.
Tax Planning vs Tax Evasion
Although, if done right, tax avoidance planning is legal, tax evasion – the reduction of tax through deceit, subterfuge, or fraud – is not. Frequently what sets tax evasion apart from tax avoidance is the IRS’s finding that there was some fraudulent intent on the part of the business owner. The following are four of the areas most commonly focused on by IRS examiners as pointing to possible fraud, and ones your CPA or Accountant should be aware of:
1. Claiming fictitious or inaccurate deductions on a return, such as a sales representative’s substantial overstatement of travel expenses, or a taxpayer’s claim of a large write off for depreciation when verification doesn’t exists.
2. Accounting irregularities, such as a business’s failure to keep adequate records, or a discrepancy between amounts reported on a corporation’s return and amounts reported on its financial statements.
3. A failure to report substantial amounts of income, such as a shareholder’s failure to report dividends, or a store owner’s failure to report a portion of the daily business receipts.
4. Improper allocation of income to a related taxpayer who is in a lower tax bracket, such as where a corporation makes distributions to the controlling shareholder’s children.
Overview of Planning Strategies
Your CPA knows countless tax planning strategies available to a small business owner. Some are aimed at the owner’s individual tax situation, and some at the business itself. But regardless of how simple or how complex a tax strategy is, it will be based on structuring the strategy to accomplish one or more of these often overlapping goals:
• Lowering the amount of taxable income
• Reducing your tax rate
• Controlling the time when the tax must be paid
• Recognizing any of the available tax credits
• Controlling the effects of the AMT (Alternative Minimum Tax)
• Avoiding the most common tax planning mistakes
When planning and putting strategies in place, you’ll need to estimate your personal and business income for the next couple years. This is necessary as many tax planning strategies will save taxes at one income level, but will create a larger tax liability at other income levels. You will want to avoid having your tax plan fail by erroneous income projections. Once you know what your approximate income will be, you can take the next step: estimating your tax bracket.
The effort to come up with exact estimates may be difficult and by its nature will be inexact. The better your estimates, the better the odds that your tax planning efforts will succeed. Hidden within the Internal Revenue Code are valuable money-saving strategies overlooked or undiscovered by many business owners. At the same time there are misleading passages that have been the cause of millions of dollars mistakenly paid to the IRS.
Lawrence & Associates, Huntington Beach CPA & Accountant
Huntington Beach Bookkeeping/Huntington Beach Tax Preparation