Whats the most tax advantaged group in the tax code? The answer may surprise you, especially if you're a business owner. But the answer is simple - you, the business owner are POTENTIALLY the most tax advantaged group in the tax code. Believe it or not, business owners get all the breaks. And no, the tax breaks are not just for the Fortune 500 companies, but the middle market, small business, or family owned business all the same. I would add a caveat to make it a little more believable and accurate. The most advantaged group in the tax code is the INFORMED business owner. If you feel encumbered by the tax code and business laws, and dont see too many breaks coming your way, its because you fall into the unfortunate group called the UNINFORMED business owners!
So, how do you become one of these favored informed business owners so you can start to see these benefits come your way? The answer is strategic tax planning. Or better yet, you need to find a professional that can provide you with comprehensive, strategic tax planning. To define it, let me first tell you what its NOT.
Strategic Tax Planning is NOT:
Tax Compliance - Tax compliance is a necessary evil. Preparing financial statements, filing tax returns, making estimated payments, and so on, is tax compliance. It is a very necessary service, but takes more dollars out of your pocket than what it puts into your pocket. I like to think of tax compliance as the scorekeeper of the football game. Keeping score as the game progresses. But if your team is losing big on any given Sunday - Do you get mad at the scorekeeper? No! And please dont get mad at your scorekeeper / accountant, they are doing exactly what you pay them to do. Tax planning, on the other hand, is the coach that formulates the game plan and develops the strategies throughout the year. Are you and your business missing this planning function?
The Big Three are:
1. Buying Equipment solely for the "write-off" - if you need the equipment great. Buying equipment in the most tax advantaged manner is wise, but I have seen too many garages and warehouses full of new, unused equipment. If the equipment is not going to make you money today, dont buy it. Does it make business sense to spend $100 to get a $30 deduction? No!
2. Paying yourself a bonus to pay your taxes. You are actually increasing your taxes (payroll and income) to pay the tax. Again the idea with tax planning is to REDUCE your tax.
3. Writing off obsolete inventory - If you have obsolete inventory, great, write it off.
But again, this is not tax planning.
End of the Year Ideas - "Wow, Mr. or Ms. Business Owner, youve had a great year or worse yet great last year - you owe a lot of tax." "What Can I do?" "Well you made money so you will simply have to pay a lot of tax!" If this sounds familiar you know this is not tax planning. Tax planning cannot simply be performed at the end of the year or the beginning of the next year. Regardless of when the taxes are actually filed, the facts that determine how much tax you pay are history at that point.
What Strategic Tax Planning IS:
Think About It..... The Need for Tax Planning!
Your business is an S-Corporation to avoid corporate level tax. The business earns $100.00. To put that in your pocket, you must pay employee and employer level payroll tax-15.3%. Your remaining $85.00 is then subject to your personal tax rate-35%. You now have $55.00 in your pocket. Do you dare spend it and reduce it further with sales tax? No, you decide to save it. If you die with that $55.00 in your pocket, the estate tax can tax an additional 45% from you and your surviving family members. You now pass on $30.00 to your family after passing $70.00 to the government in the form of taxes.