In Part 1 of our series on Tax Planning, we went over the three essential elements of developing a good Tax Plan:
1) Forecast your Taxable Income;
2) Ensure Compliance with minimum withholding requirements established in law;
3) Maximize Cash Flow and Tax Savings Opportunities.
Before we go further, let’s answer a Big Question – why is tax planning important? The elementary answer is, “because I want to pay as little as possible in taxes.” But what is the other side of that equation? It is this: Profits in your business are either going to be a) TAXED or b) INVESTED. What do we mean by “Invested”? Well, we mean things like:
- Investing in new or upgraded equipment in your business;
- Investing more in the people who make your business “go” (through employee benefits like health care, retirement plans, bonus or incentive plans);
- Investing in your production or service facility/building to make a better workplace;
- Investing in a new product line or entering a new market;
- Investing in yourself (to fund your own retirement, your children’s education, and to enhance your lifestyle)
What we are talking about here is not just “tax avoidance” (the legal kind, of course). We are talking about allocating capital (your money profits) to where that money is best used. And while it may not seem so, the IRS actually agrees that it is better for you to invest your profits in beneficial activities like those above, than it is to give a greater portion to the government.
We all must pay taxes, but it is so much more rewarding to maximize our own respective Investments in the plans and the people who are important to us.
Here are a couple of examples from last year’s tax planning at CLM:
A client, who spent 2018 re-positioning his business, moving into a new home, and having his wife change jobs, saw his income temporarily reduced. His cash flow was starting to tighten beyond his comfort zone. Despite these conditions, with careful analysis we were able to present him with a plan that would enable him to put away $28,000 to his Retirement account in just one year, funded entirely by some Capital Gains that he could access tax-free. We made sure all of his with-holdings were compliant with IRS and state law, and with only a nominal out-of-pocket contribution to the business, the estimated potential tax savings in one year totaled $12,800. In all, the plan represented over $30,000 of capital allocated to beneficial activity instead of sending $12,800 to the IRS and the state of Pennsylvania.
For another client, through careful analysis and planning throughout the year 2018 (not just all at the end) we were able to alleviate their concerns about committing a healthy $428,500 to their company retirement plan in just one year, plus give them some important year-end accounts payable and payroll expense instructions that would save at least another $20,000 in 2018 taxes. On top of that, the conversation at that time has led to an important strategic solution that will enable them to purchase the building at an estimated tax savings in 2019 of $140,000. Just these strategies alone has ensured that about $700,000 of their capital is put to long-term beneficial use, in lieu of sending about $331,000 to the governments.
If this kind of detailed planning – proactive, ongoing and specific – sounds a lot better than “finding out” from your accountant how much tax you owe the following April 15, we wouldn’t be surprised. If you are a business owner, let us help equip you to have that critical conversation with your tax advisor next November or December, and take control of your Tax Planning!