How to Leverage Tax Planning in Your Small Business

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How to Leverage Tax Planning in Your Small Business - Social ImageDavita Pray CPA @davitapraycpa provides tax preparation, business consulting, and Quickbooks services either in your facility or at my location. She provides tax preparation with the personalization that software packages can’t. She stays up-to-date with the changing tax laws, as well as any requirements for business owners. Her business is based in West Chester, Pennsylvania. As a CPA, she adheres to ethical standards and codes of professional conduct established by governmental bodies and peer organizations. For more information: www.davitapraycpa.com

SmallBizLady: What is Tax Planning?

Davita Pray CPA Tax planning is analyzing financial transactions from a tax perspective in an effort to reduce or eliminate future tax liability. 

SmallBizLady: What are the benefits of tax planning?

Davita Pray CPA Tax planning can save business owners 10s of $1000s of dollars per year over the life of the business. Tax planning is the practice of “Tax Avoidance”, which is legally using the existing tax laws and regulations to reduce the amount of tax owed. Tax evasion, however, is deliberately hiding income or other important information in order to “evade” paying taxes, which is illegal. 

SmallBizLady: How does tax planning work? 

Davita Pray CPA The client and the accountant meet to discuss current year business operations and future plans. We do a projection of the current year tax liabilities and brainstorm ways the business owner can structure future transactions in the most tax efficient manner, using the current tax laws and regulations.

SmallBizLady: Why is tax planning important for business owners? 

Davita Pray CPA In my experience, Business owners often pay unnecessary interest and penalties on their tax returns due to not paying enough quarterly estimated payments. This is due mostly to the business owner not paying attention to their business financials until tax time. Proactive tax planning can prevent paying these unnecessary penalties Furthermore, there are many provisions in the tax code that business owners can take advantage of that they may not be aware of.

SmallBizLady: When should business owners start thinking of tax planning?

Davita Pray CPA By the end of the first quarter of each year and whenever there is (or will be) a significant change in your business; such as when you are planning to make a significant investment in your business, when you see a substantial increase in gross revenue, and if you plan on starting a new line of business.

SmallBizLady: How often should owners meet with their accountant to discuss tax planning?

Davita Pray CPA Typically, twice a year. The first meeting is by the middle of the year to come up with a game plan and to assess the current year’s financial progress. Then one more time before the end of the year to ensure the previous projections are still accurate and make any necessary adjustments.

SmallBizLady: Is tax planning about just finding the most deductions in the current year? 

Davita Pray CPA No. Tax planning for business owners will typically be more comprehensive. A good tax plan will take into account both the short term and long-term goals of the business. It will often require that the business owner have an open mind. In some cases, a business owner may have to forgo getting the biggest deductions in the current year in order to save more taxes down the road. 

SmallBizLady: What common pitfalls do you see business owners make when it comes to tax planning?

Davita Pray CPA Not monitoring their finances throughout the year. This is often due to books and records not being updated throughout the year. It’s not until they see a large balance due at tax time that they consider other deductions that could be taken. I tell clients all the time that once tax time arrives, it’s already too late.

SmallBizLady: What are some common tax planning considerations for business owners?

Davita Pray CPA Entity classification is a big one. Many business owners form an LLC and think they are done. Many business owners don’t realize that an LLC is a disregarded entity for Federal Tax purposes. Depending on their type of business, they may want to consider a C or S corp. Each entity type has its pros and cons from a tax perspective and each factor should be considered prior to choose an entity type. Another consideration is the timing of transactions. For instance, if a client is planning to pay you a large invoice at the end of the year, would it make more sense to have them pay the invoice in the following year in order to avoid higher taxes? 

SmallBizLady: How can business owners benefit from the Tax Cuts and Jobs Act (TCJA)? 

Davita Pray CPA There are many provisions in the TCJA that business owners can take advantage of. There were also many deductions that were taken away. For instance, the Federal Tax rate for C Corporations is now a flat 21%. For all other small businesses that are not C Corporations, there’s a new deduction called the Qualified Business Income deduction (QBID) that can be as high as 20% of a business owner’s net profit.

SmallBizLady: How did Amazon avoid paying Federal Income taxes last year? 

Davita Pray CPA Amazon was able to take advantage of a common tax strategy called the Capital Loss Carryover. When a company experiences a loss that is beyond the deductible limit in the current tax year, the remainder of that loss can be carried forward to a number of future years to be offset against future income. 

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