Business Tax Planning

Tax planning is best done by a trained and licensed tax professional.  Tax laws, reporting requirements, special rules and regulations change too frequently for tax planning to be done correctly by anyone else.  Attempts at tax planning by non professionals often results in incorrect conclusions that make tax matters worse than no planning at all. 

The tax planning process begins, for a taxpayer who has an interest in a business entity, with bringing the business entity's accounting books and records up to date.  This is usually done near the end of the entity's tax year.  For many businesses and for individuals this is December 31.

A set of financial statements is then prepared for the business entity.  While the tax planning process is basically the same for businesses reporting on either a cash or accrual basis, the timing of the of the recognition of income and expense differs for the two different basis.  Since many small closely held businesses report their income on a cash basis, we will use the cash accounting method for our scenario here.

Payables and Receivables

The next step in the tax planning process is to compile a list of amounts owed to the business by customers and a list of expenses owned to vendors, suppliers and service providers.  A determination is then made as to which amounts owed to the business entity will be deposited in the current tax year and which amounts will be paid.  The income and expenses are then factored into the business's operations and a new profit or loss statement is compiled.

Business Income Impact on Personal Taxes

If there are multiple owners, this profit or loss number will then be factored into each owner's individual income based on percentage of ownership. Each owner's share of the income or loss is then added to his or her other individual sources of income such as salaries, interest or dividend income, stock transactions.  The total income is then reduced by allowable deductions such as mortgage interest, real estate taxes, charitable contributions, etc.

Why compute business income first?  Many forms of business income pass through the business entity without paying taxes, such as partnerships or Subchapter S corporations.  The tax savings potential of instituting a pension or profit sharing plan might be a consideration if the business has enjoyed a profitable year.  Similarly, all allowable credits and deductions will be factored into our projection of income taxes due on the individual level.

Maximizing Credits and Deductions

Credits such as the energy credit, education credits, deductions such as IRC Section 179 first year depreciation and the self employed health insurance deduction will be factored into our computation of income taxes due.  This computation is generally done during the months of October and November.  When it will result in an additional tax deduction, clients are encouraged to pay any state income or other local taxes prior to December 31 so that they can be deducted on the schedule of itemized deductions (Schedule A).  The same strategy can be used by prepaying a January mortgage payment in December.  Note that the strategy of prepaying taxes does not work for taxpayers subject to the Alternative Minimum Tax.

For business owners not involved in a pass through business entity such as a partnership or Subchapter S corporation, the process is somewhat less involved.  Al of the client's sources of taxable income are considered as are their allowable deductions and credits and estimates of federal and state income are computed.

The End Result

The purpose of tax planning is to firstly, make sure that a client has availed themselves of and considered every tax credit and tax deduction to which they are entitled.  Secondly, to avoid any "I owe how much!" surprises when their tax return is prepared in March or April and is ready to file.

A common taxpayer misconception is that if you receive a large tax refund, your tax professional has done a good job of tax planning.  If you get back a large refund your rich Uncle Sam loves you because you have been making him an interest free loan.

On the other hand, if you owe your rich Uncle Sam a lot of money when you file your return, not only will you be unpleasantly surprised but you may owe penalties for underestimating your quarterly estimated tax payments.  You will then be mad at your tax planner for not letting you know.

Our goal at Kass and Kass is to be within plus or minus $1,000 of the final amount of tax owed.  This insures that we have happy clients.

Professional Business Tax Planning

David Kass is both an experienced tax attorney and a CPA.  Esta Kass has been a practicing CPA since 1977 and is extremely innovative, creative, and ingenious in adopting tax law to the situations in which her clients find themselves.  Please contact Kass & Kass to schedule a consultation. A brief introductory consultation is available for a nominal charge.