What you need to know about the essentials of tax planning

It seems like the most important thing you need to understand about money was never taught to you. That doesn’t mean it’s too late to learn. If you start today, you can educate yourself and change your financial situation.

I know what you’re thinking, “I already have an accountant.” Most businesses who care about their finances do, but most business owners and accountants know little about tax planning. They do tax preparation, which is turning those tax documents into the IRS.

A tax planner is familiar with the laws and regulations passed by country, states, and counties. Most Americans vote off of intuition instead of informed judgment, even though the information is available. There’s something about rules or laws that exercises an amount of control over us and our will. Most accountants don’t stay abreast to tax laws because it’s out of their realm of normal duties.

Everyone that has ever sought change has found it. If we don’t encounter change, it’s because we are seeing the same things, thinking the same ideas, and feeling the same emotions. We aren’t paying attention to our environment because our environment is in a constant state of change.

They don’t teach us about money in school, at least not how we should use it, earn it, or grow it. At eighteen, we find out that we have to pay this thing called “Taxes.” Although we will all end up paying our own fair share, at most 40 percent of your income, hopefully after this article you will see the importance of tax planning.

When 69 percent of small business owners say they have benefited from the 2017 tax cuts, it’s not big dogs anymore, any business can benefit from tax planning.

Essentials of tax planning

The essentials of tax planning are split into five categories which will be covered below, start tax planning early, tax planning strategy, tax representation, and tax resolution. These basics will help you transform your business from tax-paying to a tax machine, you will keep more of the money you work so hard to earn.

These may seem obvious but most fundamentals do, we skip over the essentials because if it’s easy to do, it’s also easy to ignore. Proper sleep, dieting, and exercise are so easy they’re ingrained in the school system.

You start each class at a specific time and it gives you structure, the cafeteria serves healthy choices and physical education is a requirement. Yet outside of lower education, many of us slip into unhealthy habits and forget the essentials.

The fundamentals are as important an integral part of mastery in any subject, before playing with the professionals, you have to master the basics. We often inflate our own ability and skips the steps necessary, we go from one to thirty and miss the important fundamentals that cause an excellent outcome. If your results aren’t changing from year to year, the answer isn’t in the big details, it’s in the little ones.

The more complexity it takes to explain a subject only gives more chances to breed confusion, simplification is the best course of action to pursue when it comes to your business.

Start tax planning early

Preparation is the tool of every single successful strategist, marketer, and business owner. The earlier you prepare for tax planning, the more flexibility you’ll have in the outcome. Preparation is not only being organized but having the authority and will to move that organization into action.

It’s important to know your filing dates, which is one of the tax secrets we cover. To start you should identify any gaps in your knowledge or things that you believe with absolute certainty about taxes.

The thing is, the world is full of uncertainty and to be completely sure means we’re a master in the subject, we’ve done our research. It’s the things that you are absolutely certain about that you should question, chances are something is missing, or even greater you are missing something. 

Your business plan should include a tax plan or tax strategy if it doesn’t then you’re probably missing a business budget as well. The tax plan tells us where we need to allocate funds to lower our taxable income or increase our assets. If you want to pay less in taxes, it starts in your business planning phase, skipping this phase leaves money on the table.

As a trained analyst, we always prepare, without preparation, I can only give you my opinion. An opinion no matter how well informed is still an opinion. In order to make the best judgment I need to analyze the environment and all potential impacts on the overall mission, I only learned this after thousands of hours of preparation.

It doesn’t show in the process it shows in the results and we have complete control over the results.

Tax planning strategy

It’s important that your business has a tax planning strategy, businesses are tax savings devices, organized business records are important to prevent your business from being audited. The deductions you take will do your business no good if your business fails and IRS audit, usually it comes with fees and interest.

Organization is a good start to your tax planning strategy, your business needs a good system to keep copies of receipts and any other documents. The better organized, the less likely you’ll be audited and the less likely you’ll have any mistakes. Mistakes aren’t bad unless they cost you a few thousand dollars, those are the mistakes we only need to learn once.

“In real terms, this means I will be able to keep between $1,200 and $2,500 a quarter in my business that I would otherwise have paid in taxes. The ability to keep $5,000 to $10,000 a year in my company is a big deal to a small business owner like me.” David Cranston Jr.

Most expenses don’t cost us $10,000 a year, they add up but no where close to what we’re paying in taxes, it’s our biggest expense. Since we can’t eliminate it, we have to do what we can to reduce it, the essentials of tax planning involves working with what we have.

A tax planning strategy should be built around your business, today and the business that you’re building, speaking with a tax professional helps you maximize your tax strategy.

Speaking with a trainer saves you time from reaching your goal, you’ll learn the proper habits and exercise regime to put your body through. This knowledge is available for everyone but only a trainer can recognize what you’re doing wrong and help you to correct it. If your strategy doesn’t involve growth, eventually your business will run out of resources until it can no longer grow.

Organization is a key element in any tax planning strategy, your documents should be well organized to answer the questions about your business activities. Organizing starts early and it is important that your business has a tax planning strategy.

Tax representation

If your business is chosen for an audit having tax representation will make the process go smoothly. The IRS is going to ask you questions you may not understand so it always pays to have a professional.

IRS representation gives you time away from your investigation to continue working on your business, an investigation takes away one of our most precious resources, time. Most of us are intimidated by authority and can be unsure when it comes to speaking with an expert, we get nervous. Tax representation is confidence in the case you do receive an audit, but like most business owners, I would rather have an umbrella and not need one than need one and not have it.

Tax resolution

If you were unable to file or pay your taxes for a specific year tax resolution is what your business needs. Tax resolution can help minimize the amount you’ll have to pay and if you’re late on taxes, the interest can add up. Tax resolution is similar to IRS representation but the main goal is to help you resolve your debt with the IRS while minimizing as much debt as possible.

Tax resolution should be managed by a professional to ensure that all doors are closed and you’re not paying more than necessary. If you handle this process yourself, you might forget something and it could trigger an audit to an already messy file.

A big part of tax resolution is created because of mismanaged books, if your books are a mess, you need a clean up team not a tax professional. Cleaning up accounting books also requires implementing new procedures to prevent future problems, and training anyone involved to keep your businesses accounting system running smoothly.

Tax secrets

These tax secrets will alleviate unnecessary stress and you might even kick yourself in the foot because of how obvious these are. Your business can only benefit from the tips you apply and the things you say no to.

You might have a CPA and they might do a fantastic job but if they’ve never done tax planning, your business is missing a key element when it comes to finances. You don’t have to hurt your relationship, that’s not the goal, the goal is help your business and your relationship. Say no to the advice of your friends and say yes to a professional.

It might be tempting to spend money to reduce your taxable income, but only if your investments are maxed out. Most businesses make the mistake of looking at depreciating items instead of assets that produce cash flow. Say no to spending without investing. Equipment is fancy but investments pay you back.

If you’re stressed whenever tax season comes around then it may be time to consider investing more time into preparation, only by discovering your needs with a CFO can you shift your attention. Some businesses need organization and procedures while others need focus, all businesses need a tax planning strategy.

Common questions about taxes

These are the most common questions we get about taxes, if you have any additional questions please reach out to us. The most common questions are:

How can I reduce my taxable income in 2020?

Don’t wait until 2021 to ask how you can reduce taxable income, the best way to reduce your taxable income is to maximize retirement savings. If you haven’t started making retirement investments then consider how you can start today, the best asset for investing is time.

What is effective tax planning?

Effective tax planning is not only minimization but the consideration of all elements and variables when maximizing, however most tax research focuses on minimization. Ineffective tax planning only looks at one element of the business and how to reduce taxes, reducing taxes is a great strategy however there are more strategies that your business can benefit from.

What are the best strategies to use in tax planning?

The best strategy would be the one that helps you work towards your desired outcome with tax planning and you can discuss more on building that outcome with a tax professional. The best strategy to use otherwise is the simplest: reduce your overall income, increase your number of tax deductions throughout the year, and take advantage of tax credits.

What does tax planning include?

Tax planning includes the implementation of various strategies in order to minimize the amount of taxes paid for a given period, planning revolves around your business and the specific laws and regulations governed. Tax planning involves a small business minimizing their tax liability to provide more money for investments, growth, and cash flow. Tax planning is a powerful resource for working capital.

What percentage does a small business pay in taxes?

The effective small business tax rate is 19.8% on average, businesses pat different amounts based on their entities. With the right tax strategy, your business can pay only what it has to and no more.

Do you have to pay taxes if you own a business?

All businesses must pay taxes on income or profit the company generates. Avoiding taxes causes a late fee with a penalty to pay, fees add up.

Do I benefit from tax planning if I have a CPA?

Most of the clients we assist with tax planning already have a CPA and still benefit from tax planning with us, most accountants aren’t tax planners, they are accountants. The training involved in tax strategy is often complex and outsourced by accountants.

Bottom line

The essentials of tax planning are basic steps anyone can take to prepare for tax season. In order to benefit the most from tax planning you should speak with a tax professional about your assets, we go to the doctor to get a second opinion, we should do the same for taxes.

Tax laws will continue to change and the ones that benefit are the ones that pay attention to and maneuver their assets along with these changes. Learning about taxes allows us to play the game properly but speaking with a tax professional about a tax strategy allows us to win. Businesses have the most opportunities for maximizing their tax reductions and implementing tax strategies.

Let’s talk about your taxes today, schedule a call with Rosa.