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The Principles of Proactive Tax Planning [Five Considerations for Business Owners]

Written by Katye Coats on August 23, 2021

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There are hundreds—sometimes even thousands—of decisions a business owner must make in any given season.

With a never-shrinking list of decisions to be made, responsibilities to uphold and goals to be met, tax planning can sometimes take a back seat or even be left out in the cold. Taking a proactive approach to tax planning is an even greater challenge, but it’s an important part of strategic business planning.

Just like any other aspect of business ownership, a lack of proactive planning in tax strategies can put your business behind the curve in comparison to your competitors. If your business hasn’t been focusing on proactive tax planning, there’s no time like the present to start.

That’s why we have identified five key areas where you can make a big impact for your business’s tax planning.

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Proactive Tax Planning Consideration #1: Review Your Accounting Methods

Are you paying tax on billed earnings where you haven’t collected cash? Are you eligible to become a cash-basis taxpayer wherein you pay tax only on income actually received?

The latest tax reform opened the door to a great number of businesses to be eligible to use the cash method of accounting as opposed to the accrual method of accounting.

If your business averages less than $25 million in gross receipts over a three-year period, you’re likely eligible to convert your tax method from accrual to cash-basis. This amount is newly raised from the previous threshold of $5 million in gross receipts.

Evaluating your method of accounting may provide opportunities to switch and save.

Proactive Tax Planning Consideration #2: Plan Strategically for Capital Purchases

Have you been putting off replacing a piece of equipment, like a computer, an equipment truck or an HVAC system?

Review of accelerated depreciation available through Section 179 and bonus depreciation can help you lower your tax bill while also meeting business needs.

A read-through of the tax regulations for depreciation can be a real snooze-fest, but don’t sleep on these opportunities! There are additional means to get an immediate write-off of smaller purchases by making a simple de minimis election in which purchases less than $2,500 each (or in the right circumstances, as much as $5,000) can be directly expensed.

If you aren’t looking to make any purchases in the near future, you can still create tax savings through depreciation by having a cost segregation study performed on existing buildings.

Proactive Tax Planning Consideration #3: Interim Planning and Quarterly Estimates

Periodic review of actual and projected income can help you better understand and manage  your tax position. Also, paying taxes quarterly can help you to avoid penalties and better manage cash flow.

If your income  is expected to be higher in the current year, paying only the safe harbor amount in estimates can allow you to keep cash for your business without incurring underpayment penalties. Inversely, if income is expected to go down, recalculating tax payments to more accurately reflect actual income can lower your tax payments and, again, keep more cash in your pocket.

There are also new opportunities provided at various state levels to pay tax as an entity, rather than an individual.  Why is this big news? Because it allows you to deduct your state taxes paid in full!

This is a big reversal of Tax Cuts and Jobs Act (TCJA) provisions by some states. Front-runners in this change are Alabama and Georgia, with new states adding provisions frequently.

Proactive Tax Planning Consideration #4: Tax Credits

Tax credits are sometimes the most under-utilized savings path for business owners.

A tax credit is a dollar-for-dollar reduction of your tax bill, as opposed to a tax deduction, which lowers your taxable income amount on which your tax is then calculated.

Hiring practices, entrepreneurial discovery efforts, going green and other expenses you may already be incurring could make you eligible for tax credits. The Employee Retention Tax Credit made available by recent legislation is one of the most lucrative tax credits in history available to employers.

Identifying and navigating the requirements to become eligible for these credits can seem overwhelming, but the end result can be more than worth the effort.

Proactive Tax Planning Consideration #5: Succession Planning

Succession planning can be a difficult topic to approach, but it’s an important one to prioritize. No one wants to consider the possibility of any situation in which an immediate transfer of a business would be necessary.

While there should definitely be planning for those kinds of transitions, succession planning is also much more than that; it encompasses everything from retirement contributions to creating an exit strategy to planning your estate.

Failure to adequately plan for these things can mean that your hard-earned dollars have to be used to pay unnecessary taxes. Careful consideration of any number of potential exit strategies is an investment of time that will always pay future dividends.

It’s never too early in the life of a business to begin thinking about how you want your business to exist or wind-down successfully when you’re no longer at the helm of it.

So, What Now?

These five proactive tax planning considerations are just a small peek into the tax savings opportunities that are available to business owners. The requirement to pay taxes is still a life certainty, but the ability to maximize tax savings can help you as a business owner with the right tools and planning.

It’s important to note that the landscape in which you operate your business will only continue to become more complex—not less.

Quite possibly the most valuable tool in your arsenal is the right team of advisors who are continually evaluating your unique situational landscape to keep you in the most advantageous tax position both now and in the future.

To learn about your company’s specific tax positions and what tax savings opportunities may be available to your business through proactive tax planning, request contact from a Warren Averett advisor who can help.

Katye Coats is a Tax Senior Manager at Warren Averett who provides tax compliance and consulting services for businesses. Contact her directly at Katye.Coats@warrenaverett.com.

This article was originally published on August 30, 2019 and has most recently been updated on August 23, 2021.

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