#2 - From Reactive to Proactive: Transforming Your Business Tax Strategy

My understanding of tax planning emerged from over 15 years of working at my dad's tax practice. In the early days, I was sending out envelopes and doing basic input on tax returns, eventually progressing to preparing and finalizing tax returns for businesses and individuals. It was during this time that I began to understand the complexity of income taxes. When done intentionally, proactive tax planning can greatly impact your tax situation but outcomes can vary based on individual circumstances and changing tax laws.

One concept that stood out to me then, and which I apply to the work we do for our clients today, is the fact that if your tax plan is not aligned with your strategic financial plan, there can be major pitfalls and missed opportunities as the tax landscape continually changes. I learned not only how to prepare tax returns but also the importance of understanding tax planning to create long-term tax efficiency for my clients.

At E-Wealth Partners , when working with our clients who own businesses, there are several key tax planning areas we focus on, including but not limited to:

1. Choosing the Right Savings Strategy: We match the best way to save with the client’s expected tax bracket for that year. For example, during years when clients earn more and are in a higher tax bracket, we look at saving options that reduce taxable income, like pre-tax 401k and IRAs. In years when they earn less, we might recommend Roth IRAs or taxable accounts since the tax deduction isn't as impactful. This planning isn't just for the short term but looks ahead to future years to save on taxes. If your income varies year to year, likely your savings strategy should as well. It's important to note that tax laws are subject to change, and strategies should be regularly reviewed with a financial professional.
2. Business Income and Expenses Planning: We assist clients in strategically thinking through when to recognize income and expenses in their business, especially near year-end. This includes the timing of certain expenses and decisions around equipment and fixed asset purchases. Additionally, we work with our client and their tax preparer on determining what depreciation method should be applied. If the business owner has high income or is having a great year that’s not anticipated the next year, we may consider bonus/accelerated depreciation. If we expect income to be higher in future years, we may recommend straight-line depreciation so it is spread out evenly over the years. We help guide the expense decision for the business owner to be more of a decision about business growth, rather than a tax deduction. If we spend to spend, for a tax deduction, that game-plan will not be fruitful long-term.
3. Retirement Plans and Workplace Benefits Optimization: As a business owner, you may or may not know all of the retirement plan and workplace benefits options available to you and your employees. We help our clients think through what makes the most sense for them and their employees. Some examples include helping analyze when it makes sense to move from a Simple IRA to a 401(k), when to add a tax-deferred profit-sharing plan, or when to implement or change employee benefit options. In doing this analysis, we need to carefully consider the tax impact, the benefit to the owner, and the benefit to the employees.

These areas are a few examples of the strategic thinking you should expect a financial planner to bring to the table, especially as our tax landscape continues to change. The ability to navigate these considerations effectively is something I take great pride in.

Working closely with a financial planner, in tandem with your tax preparer, can significantly enhance your tax situation by creating tax efficiency and help you sidestep common pitfalls. One pitfall is the lack of a clear forecast of what your estimated tax may be. No business owner wants to be caught off guard at tax time, facing an unexpectedly high tax bill or realizing they've significantly overpaid. While efforts are made to estimate tax liabilities accurately, actual amounts can vary due to individual circumstances and changing tax laws.

Lastly, the focus should not solely be on minimizing taxes in the short term but on achieving tax efficiency that aligns with long-term goals and visions. This approach ensures that tax planning contributes positively to the broader financial strategy, supporting the client's ultimate objectives and life plans.

Considering all these points, it's wise to think about booking a session with myself or another experienced financial planner who deeply understands tax planning. There might be tax-saving moves you haven't used yet that could still work for last year's taxes if you act before the filing deadline. This is not a guarantee of tax savings as individual situations vary.

Helping our clients optimize their financial plans is something we're passionate about, and we're here to guide you every step of the way.

If you're interested in discussing how to develop a more tax-efficient strategy that aligns with your financial plan, feel free to reach out to me — Schedule a Free Discovery Call

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