Unfortunately, many businesses overpay their taxes because they aren’t aware of tax opportunities that they can take advantage of, like tax credits or incentives. The best way to avoid doing this? Creating a sound tax strategy or plan for your business.
The essence of creating a tax plan is strategically minimizing taxes in a manner in accordance with the tax regulations. In its most simple form, a good tax strategy will:
- identify and legally avoid any taxes that aren’t essential for a business to pay; and
- defer taxes when there is an opportunity to do so (and where it makes sense).
If you aren’t sure whether the tax plan you have in place is saving your business money or costing you money, it’s time to evaluate your tax strategy with an advisor. Here are four key markers of businesses that have sound tax plans (and what to do in your own tax plan if your business doesn’t fit the description).
1. They start planning early and revisit their plan often.
If you haven’t created a tax strategy for your business, there’s no time like the present! While many businesses intentionally focus on tax planning at the end of the year, it’s important to keep it in mind throughout the year.
Depending on your business’s specific operating or financial goals, a good tax strategy can take anywhere from a few weeks to several years to effectively implement. That’s why, in order to implement the best tax plan for your business at the right time, it’s best to start now.
A great deal of insight about a tax strategy can come from a business’s basic financial statements (documents like your balance sheet, statement of cash flows and income statement), so it’s helpful to review them consistently, and it’s important to continually review any changes or events in your business with your advisor.
Being able to make conclusions about your business’s finances and tax strategy throughout the year can help make your strategy more agile, help your advisor to identify advantages and thereby, help you seize any savings opportunities.
2. They create separate strategies and conduct separate evaluations of their federal and state tax plans.
It’s important to make different considerations for state and federal tax strategies and to examine your tax plan for every location in which your business operates.
Especially now, with recent changes to tax laws at the state level, it’s important to know in which states your business is required to file a return. Consider conducting a thorough nexus review of each state where your business has a presence to determine where you are required to file.
And, because state tax laws vary across the country—not to mention are constantly changing—you’ll want to review each state’s tax provisions in order to fully identify your savings opportunities.
This can allow you to not only take advantage of any tax savings opportunities that you may be missing, but it can also keep you in compliance with state regulations and avoid pains associated with sales and use tax audits.
3. They know which business expenses are deductible and which aren’t.
In light of the Tax Cuts and Jobs Act of 2017, there have been many different changes as to which expenses are deductible for businesses.
In the past, business meals and entertainment expenses have been grouped together into one category (from a record keeping standpoint) for which a business could take a 50% deduction. Now, business meals and business entertainment expenses are categorized separately. While business meals are still 50% deductible (100% deductible for employee meals included in compensation), business entertainment expenses are not.
In addition, for for-profit businesses that provide parking for their employees, some parking expenses may no longer be deductible.
Knowing which expenses are deductible and which aren’t deductible before you file your tax return can help you to provide the right documentation and report those deductions correctly.
|Pre-Tax Reform Deduction||Post-Tax Reform Deduction||Additional Information|
|Office Parties||100%||100%||Primarily for the benefit of the employee|
|Employee Travel Meals||50%||50%||Meals while away on business|
|Meals Provided for the Convenience of the Employer Located on the Employer’s Premise||100%||50%||Cafeterias on the premise of the employee (e.g., hospital cafeteria)|
|Meals with Clients||50%||50%|
|Entertainment||50% of qualifying entertainment expenses||No deduction||Sporting events, concerts or other events|
4. They have an advisor who understands their business operations and the tax law.
The best way to create a tax strategy is to partner with a tax advisor who understands the tax code, as well as your specific business, its goals and operations. Two heads are always better than one when it comes to formulating a tax plan—especially if one of those heads is a CPA.
It may sound basic, but understanding the activities of your business through and through (and communicating those nuances) can help you and your tax advisor identify potential tax advantages. There are many advantages that are specific to particular industries or credits and incentives that are specific to particular activities, so you’ll want your advisor to be able to help identify those opportunities.
In order to create a solid tax strategy for your business, find a trusted tax advisor and be sure that your advisor understands:
- How your business makes money and what your business’s operations look like
- Your business’s goals for the future
- Any major changes that have recently happened in your business (offering a new service line, substantially increasing your workforce, etc.)
- Any large purchases you’ve made in the past or any large purchases you’re planning to make
- Where your business conducts its operations, offers its services and sells its goods
- New locations or plans to expand your business into new areas
- Your online platform that you use to conduct business
- Any external forces expected to impact your business in the near future (industry trends, etc.)
Creating a Tax Strategy for your Business
No two businesses will have the exact same tax strategy. Having the most effective strategy that is the best fit for your business is dependent on customizing your plan to reflect your specific circumstances.
Connect with a Warren Averett advisor who can help you navigate the tax advantages and opportunities for your specific business and help create a custom tax strategy that benefits your company.