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 Tax planning is a process of looking at various tax options in
order to determine when, whether, and how to conduct business and
personal transactions so that taxes are eliminated or considerably
reduced.
Many small business owners ignore tax planning, and don’t even
think about their taxes until they’re scheduled to meet with their
accountant; but tax planning is an ongoing process, and good tax
advice is a very valuable commodity. You should review your income
and expenses monthly, and meet with your CPA or tax advisor
quarterly to analyze how you can take full advantage of the
provisions, credits and deductions that are legally available to
you.
Although tax avoidance planning is legal, tax evasion – the
reduction of tax through deceit, subterfuge, or concealment - is
not. Frequently what sets tax evasion apart from tax avoidance is
the IRS’s finding that there was some fraudulent intent on the
part of the business owner. The following are four of the areas
most commonly focused on by IRS examiners as pointing to possible
fraud:
A failure to report substantial amounts of income, such as a
shareholder’s failure to report dividends, or a store owner’s
failure to report a portion of the daily business receipts.
A claim for fictitious or improper deductions on a return, such as
a sales representative’s substantial overstatement of travel
expenses, or a taxpayer’s claim of a large deduction for
charitable contributions when no verification exists.
Tax Planning Strategies
There are countless tax planning strategies available to a small
business owner. Some are aimed at the owner’s individual tax
situation, and some at the business itself. But regardless of how
simple or how complex a tax strategy is, it will be based on
structuring the strategy to accomplish one or more of these often
overlapping goals:
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Reducing the amount of taxable income
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Lowering your tax rate
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Controlling the time when the tax must be paid
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Claiming any available tax credits
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Controlling the effects of the Alternative Minimum Tax
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Avoiding the most common tax planning mistakes
In
order to plan effectively, you’ll need to estimate your personal
and business income for the next few years. This is necessary
because many tax planning strategies will save tax dollars at one
income level, but will create a larger tax bill at other income
levels. You will want to avoid having the “right” tax plan made
“wrong” by erroneous income projections. Once you know what your
approximate income will be, you can take the next step: estimating
your tax bracket.
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