What is Tax Planning?

Tax Planning is the process of taking the complete view of your entire financial situation or plan and optimizing on the use of every allowance. This is to ensure your tax liability is as small as possible and your tax savings are as large as possible. The total list of deductions, allowances, and tax opportunities is probably greater than you could imagine.

The goal of tax planning is to become as tax efficient as possible. A built-in biproduct of proper tax efficiency is the tools, resources, and funds to plan and save for your future. Up to your retirement, and beyond! Focused planning can even provide financial security to share with the next generation.
                                                                             
Where do I start?

Although it is never too early to start tax planning, most experts agree there is a sweet spot. They suggest small business owners perform formal tax planning sessions the middle of each year. 

The first step is deciding on the best type of planning for you. Whether you are doing the tax planning yourself or you choose an accountant with years of tax experience, a Tax Planning Sidekick (ahem... ahem) to help you with it, the planning starts with understanding the different areas of tax planning.

What are the top tax planning areas of opportunity?

Types of businesses and their tax opportunities - Hype in the type

There is an area of tax planning that focuses on your type of business. Each type, whether it be a sole proprietorship, partnership, C corporation, or S corporation, has its own tax liability situations as well as opportunities for tax savings.

• Sole proprietorships and partnerships- Like individuals, sole proprietorships are taxed through the personal tax return of the owner. The business owner files with the IRS an informational return for their business, and then reports any income taken from the business for personal use on their own personal tax return.
• C Corporations- Can be eligible for considerations like Qualified Small Business Stock (QSBS) treatment. This can add up to huge tax free or tax deferred benefits.  On the flip side, income from a C corporation is taxed twice. The corporation pays tax on its net income and the shareholders are also taxed on the dividend distributions they receive.
• S Corporations-Pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. Like the sole proprietors above, the shareholders of S corps report their income and losses on their personal returns and are assessed tax at their individual income rates.

How accounting methods affect tax planning
Will that be cash? 

Your business choice of accounting methods makes a difference. Whether you operate your business as cash method or accrual method, there are opportunities to leverage timing of billings and payments. 

• Cash method- Usually the simpler method, expenses are only recorded when cash is paid out. This allows more flexibility. Shifting deductions into this year can be done by accelerating the payment of expenses, and conversely, delaying invoices allows the deferring of income into next year.
• Accrual method- Recognizes income when it is received and deducts expenses when they are paid, without regard to the timing of cash receipts or payments. Accrual method companies have tax advantages such as deducting year-end bonuses that are paid within the first 2 1/2 months of the following year and deferring income on certain advance payments.

Tax advantages of hiring family members
All in the Family

Another area involves wages paid to family members. Paying wages to dependent children or a spouse can reduce your tax burden.

• Hiring children in the family- Children under 18 who are employed under their parents or guardian’s sole proprietorship are not subject to certain specific taxes such as Medicare and Social Security. They are subjected to withholding taxes, however, wages paid to them are taxed in lower tax bracket than that of a parent.
• Hiring your spouse or a parent- The compensation paid for your spouse will stay in the corporations’ net income, which in turn will save you on taxes. If you go on a business trip with your spouse, you can deduct both of your travel costs. In most cases you can also deduct the full amount of your spouse’s plan retirement from your payroll as well a portion of any contributions paid to them as part of a profit-sharing plan. For health insurance, you can also deduct the entire premium of your spouse’s health insurance from the company’s expenses. When employing parents, their wages are subject to FICA withholding taxes, but not to FUTA taxes.

Tax savings with Investment and Retirement accounts  
Making bank and filling your tank

Investments and retirement contributions can play a very large role. They can shift tax liability to the future or in some cases be leveraged for total tax avoidance.

• Investments- Certain investments such as bank certificates, treasury bills, savings bonds and deferred annuities can shift tax liability to future periods. Companies can avoid paying taxes during the current income period for income that is reinvested in these types of products.
• Retirement contributions- Contributions done correctly, in the right types of retirement accounts can not only help you save for tomorrow, but also leverage tax savings today. Whether it is a SEP, a simple IRA, 401 (k) or Roth IRA, each plan has its own advantages and unique opportunities. 

Other (not as obvious) tax advantages
So many opportunities, so little time! 

Additional tax credit opportunities available. There are several tax credits out there for small business owners like you. Too many to list, but here is a taste.

• Charitable contributions- Most people are aware that charitable donations can be deducted from income taxes, but there are a handful of tax planning strategies that can be used to leverage the donation and to increase the impact.
• Qualified opportunity zones- The “QO” zone program was created to help low-income communities and provide taxpayers a way to defer capital gains tax. It incentivizes long-term investment in low income and economically distressed communities by deferring capital gains tax when the taxpayer invests those gains into QO Funds.
• CAA (Consolidated Appropriations Act)- Created as an addition to the CARES act COVID-19 relief bill. Opportunities like employee retention tax credit, paid sick and family leave credits, employer social security tax deferral add to the list of tax saving options.
• R & D Tax Credit- This tax credit can be claimed by businesses that develop, design, or improve products, processes, formulas, or software. Potential savings with this opportunity is usually much more expansive than small business owners realize.

As your Tax Planning Sidekick, I am always ready to answer any questions you may have.

Contact me today! megan@sidekick-accounting.com