Tax planning is the process of looking at various tax
options in order to determine when, whether, and how to conduct business and
personal transactions to reduce or eliminate tax liability.
Many small business owners ignore tax planning. They don't
even think about their taxes until it's time to meet with their accountants,
but tax planning is an ongoing process and good tax advice is a valuable
commodity. It is to your benefit to 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.
Although tax avoidance planning is legal, tax evasion - the
reduction of tax through deceit, subterfuge, or concealment - is not.
Frequently what sets tax evasion apart from tax avoidance is the IRS's finding
that there was 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:
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.
Claims for fictitious or improper deductions on a return
such as a sales representative's substantial overstatement of travel expenses
or a taxpayer's claim of a large deduction for charitable contributions when no
verification exists.
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.
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.
Tax Planning Strategies
Countless tax planning strategies are available to small
business owners. 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:
Reducing the amount of taxable income
Lowering your tax rate
Controlling the time when the tax must be paid
Claiming any available tax credits
Controlling the effects of the Alternative Minimum Tax
Avoiding the most common tax planning mistakes
In order to plan effectively, you'll need to estimate your
personal and business income for the next few years. This is necessary because
many tax planning strategies will save tax dollars at one income level, but
will create a larger tax bill at other income levels. You will want to avoid
having the "right" tax plan made "wrong" by erroneous
income projections. Once you know what your approximate income will be, you can
then take the next step: estimating your tax bracket.
The effort to come up with crystal-ball estimates may be
difficult and by its very nature will be inexact. On the other hand, you should
already be projecting your sales revenues, income, and cash flow for general
business planning purposes. The better your estimates, the better the odds that
your tax planning efforts will succeed.
