Tax Planning: Essential for Business Growth and Managing Tax Risk

When filing taxes for a small business, the mechanics of tax planning and compliance are critical to mitigate risk and reduce tax liability. Tax planning and compliance can be viewed as a continuum in tax preparation, with detailed planning throughout the year setting up the business for successful compliance with federal, state and local tax laws.

Tax Planning

Tax planning is a year-round pursuit during which the business tracks expenditures and purchases that may affect the taxes paid. Detailed record keeping and receipt retention are essential for items such as:

• Building and equipment rent,
• Salaries and wages,
• Employee benefits,
• Office supply purchases,
• Building and equipment maintenance and repairs,
• Renovation and building/plant expansion costs,
• Marketing and advertising costs,
• Vehicle costs, and
• Travel expenses.

To confirm the financial information needed to be tracked, check the IRS website for a list of tax-deductible expenses and the rules governing each.

Tax Preparation

The next step in tax preparation is tax compliance, which benefits from meticulous tax planning. Tax compliance is exactly what it seems — complying with tax laws governing business finances, including federal, state, municipal and international, as applicable. With the varying requirements for, and caveats to, tax laws, conscientious tax planning creates a solid foundation for tax compliance.

An essential factor for tax planning is knowing the difference between tax deductions and tax credits. Both save the business money, yet, each has different requirements for claiming tax-saving benefits.

Deductions Reduce Taxable Income

Tax deductions reduce taxable income, which can lower the amount of tax ultimately owed by the business. Below is a list of typical business tax deductions:

• Salaries and wages
• Employment tax: Social Security and Medicare taxes; unemployment taxes
• Business and equipment rent
• Repairs and maintenance
• Employee benefits
• Vehicle expense
• Professional services
• Sales tax: Imposed on goods and services by many U.S. states, as well as counties and cities; taxable items will vary by locale
• Other state and local taxes:
  • Income taxes: Vary based on the entity structure of the business and the tax laws of the state in which it operates
  • Property taxes: Impact businesses that own buildings, land or other real property that may be taxed at the state and local levels
  • Franchise taxes: Many states impose franchise taxes, gross receipts taxes or similar business-level taxes in addition to other state tax obligations
  • Business license fees: Apply to businesses required by federal, state or local governments to obtain a license and pay the appropriate fee
• Other business expenses: Costs of running a business are mostly deductible and can include utilities, travel expenses, office supplies, equipment, advertising/promotion, internet and wireless services, etc.
• Depreciation: Certain capital assets must be deducted over their useful lives rather than fully expensed in the year of purchase, although accelerated methods such as Section 179 expensing or bonus depreciation may be available

Tax Credits Reduce Tax Liabilities

While tax deductions reduce businesses’ taxable income, tax credits reduce taxes on a dollar-for-dollar basis. The following are typical tax credits:

• The work opportunity tax credit (WOTC) is available to businesses that hire and employ members of identified groups
• Energy efficiency and renewable energy credits
• Disability access credit
• Research and development (R&D) credit
• Credit for employer provided medical leave
• Employer provided childcare credit

Tax credit eligibility requirements vary significantly, and some credits require pre-certification, specific documentation or timely filing of supporting forms. Check the IRS website for a complete list of business tax credits and the forms to claim them.

Preparation Compels Compliance

Effective tax planning is not a year-end activity but an ongoing business process. By maintaining accurate records, periodically reviewing tax strategies and consulting with qualified tax professionals, businesses can strengthen compliance, reduce tax liabilities and make more informed financial decisions. A proactive approach to tax planning helps business owners focus on growth while minimizing unexpected tax consequences.

Contact Mark Tuscany, Dan Sexton or a member of your service team to discuss this topic further.

In this blog Cohen & Co is not rendering legal, accounting, investment, tax or other professional advice. Rather, the information contained in this blog is for general informational purposes only. Any decisions or actions based on the general information contained in this blog should be made or taken only after a detailed review of the specific facts, circumstances and current law with your professional advisers.