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There are three components to tax planning that every business should consider using to minimize their taxes:
Year-end planning is a short-term plan usually prepared in the last three months of the tax year. Some planners use canned programs and others, like myself, build a spreadsheet template to compute the tax on the assumption that things will continue as they are. The various options open to the business are then plugged in and software computes the change in the tax due line. These options to consider might include such basic steps as purchasing equipment or paying bonuses before the tax year runs out. The plan will also normally be used to minimize the impact of estimated tax penalties.
Transaction planning typically involves large deals such as buying or selling a business. These planning steps are also done with software with the major difference being that they are designed to provide information on how to structure the deal. This information will sometimes be shared as both the buyer and seller have an interest in reducing the tax impact on the deal. The results of transaction planning are strategic and generally will have an impact over several years.
Large and complicated transactions need to be examined in front of the event. Once it has happened, the only thing left for the tax planner is to figure out how to report it as favorably as possible. I have had more than one client call me and say, by the way, I bought an office building and put it in my name. That was the right thing to do, right? The right or wrong answer to that question is now somewhat immaterial.
Audit proofing involves reviewing your operations to determine the impact that a tax auditor might on you. This procedure is performed by having a professional perform a mini-audit using the same steps that a tax auditor might be expected to use. The results are reduced to a dollar value and changes to operational procedures recommended.
Audit proofing is the most overlooked and effective planning tool available to reduce taxes. It is particularly applicable to sales tax audits since the failure to correctly collect the tax shifts the burden from the consumer to the seller. I once hired an ex-Sales Tax Auditor to perform an audit for a retailer with over ten million in sales. The auditor spent about half a day at one site and submitted a report with recommendations that the client followed. Several years latter, the client got his audit notice and gloomily confided to me that he was expecting a tax bill in excess of $25,000. Preparation for the audit paid off however and the result was a No-change report. Not bad considering that the audit-proofing fee itself was about $500.
Controlling your taxes is important to even the smallest business. Even small businesses are paying from 40 to 60 percent of their profits in taxes to the various government taxing authorities.
Consult your tax advisor at least once a year for a tax plan and keep him or her advised of any major transactions you may be contemplating. Ask your CPA for a fee quote on a mini-audit of your business. Lets help the economy by not sending to Congress any more cash than we have to.
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This Web site presents information to educate members of the public on various business subjects. The information on this Web site is compiled from a variety of sources. It may not be complete or timely. It does not cover all aspects of any tax, financial or accounting matter. If you have any tax, financial, accounting or related questions, please consult a qualified certified public accountant licensed in your jurisdiction or in the appropriate jurisdiction promptly.