The goal of business tax planning is to take full advantage of opportunities to minimize your tax burden. To do that, you’ll need to regularly analyze your current financial situation and any financial changes you expect or hope to occur in the near-to-medium term, as well as understand the tax laws and regulations that apply to your business.
Whether you are doing your own business tax planning or sitting down with a tax advisor, here are some essential questions you should be ready to ask and have answered.
- Am I planning significant growth? If your business is actively pursuing growth, you will want to be particularly proactive with forecasts of future taxable income, plus where income growth will come from and how to minimize your tax burden based on a variety of new inputs.
For example, if you plan to acquire pre-existing businesses as part of your growth, your tax strategies will be different than if you intend to open new locations. Your tax strategies will differ if you plan to use debt financing rather than equity financing. The laws and regulations may vary for any and all aspects of your growth plan, so you’ll need to engage in quality forecasting to be as tax efficient as possible each step of the way.
- Is my current business structure still the most tax efficient? Changing your business structure is not something to take lightly, as it can require a lot of changes to your record-keeping and accounting process, but there are times that a change can be worthwhile from a tax-efficiency perspective.
Ask your tax advisor if it would be beneficial to change from a sole proprietorship to an LLC, an S-Corp, a partnership, or a corporation. Each has its own benefits and negatives, and it may be time to adjust to reap more benefits.
- Are there harvestable losses on my books? If you have securities or other assets on your books that have lost value, it may be worth it to divest those assets at a loss to offset gains in other areas. The rules for calculating losses can be complicated, so if you are not using a professional tax advisor, you will almost certainly want to consult one.
- Are there actual or proposed tax law changes related to my business? You will want to know what changes have been made, or may be made, for the upcoming year. Among other things, tax rates could change, tax credits could change, deductions could be added or lost, or compliance rules such as filing dates could change. You’ll want to know what these are and how they could affect your tax efficiency or change your accounting and record-keeping processes.
- Am I taking advantage of every possible deduction? There are so many deductions available that it can take a lot of work to keep up with what they are and whether they apply to your business. The tax planning process is a great time to review potential deductions with your tax advisor. To get a head start, check out our Small Business Tax Deduction Checklist.
- Am I prepared for an audit? Audits happen, and the tax planning process is a great time to review your audit-ready status. An experienced tax advisor will have guided clients through the audit process before and be able to identify any weaknesses in your record-keeping or other areas. They will be ready to suggest improvements to improve your audit readiness, as it can only make their job easier.
Nobody wants to get audited, of course, but if it happens, you want it to be smooth, quick, and penalty-free. There’s no point in paying fines and back taxes because of simple accounting or record-keeping errors that could have been prevented.
All business owners should be actively engaged in business tax planning, either at the outset of each tax year or (preferably) at consistent intervals throughout the year. If you are using a proven, reputable tax advisor, you can expect them to be well acquainted with the tax law related to your specific business. But you will still want to ensure you have the answers to the questions above, both to be sure that your advisor has everything covered and to make sure you know your own responsibilities in terms of rule-following and record-keeping. When you have everything in place to minimize your tax burden, you are one step closer to maximizing your profits.