Successful businesses reduce their tax liabilities legally, and as much as they possibly can. They achieve maximum tax reduction by planning ahead, and they base that planning on sound, professional advice. After that, they stay focused. They base all their financial decisions on those three principles:
Larger businesses employ tax accountants, small and medium-sized businesses do not; they hire in the advice at appropriate times during the year. Regardless of which they do – employ full-time or hire in – successful businesses put in place the right financial control systems. Those systems encourage planning, and enable continuous focus, so tax liabilities are always taken into account as part of major decision-making. Entrepreneurs are busy establishing, growing and running their business. They use the advice they get on tax law and financial control systems to help them to plan ahead.
Tax professionals help entrepreneurs to answer questions that impact future plans as well as current and future tax liability. A business owner must decide, for example, whether it is better to: Buy new capital equipment or lease it. Factor their invoicing to balance the accounts payable and accounts receivable cycle or to keep control of prompt payments by customers in-house, in order to maximize cash flow. Invest trading profit in 401k’s, SEPs, new equipment or broader marketing programs. The right decisions on topics like these will make a big difference to the year-end balance sheet. It is the year-end balance sheet that determines how much tax gets paid this year, so the right advice enables forward planning to keep the tax liability down.
Major expenses impact not only this year’s tax bill, but they also affect future years’ bills. Federal and individual states’ tax laws change. Emphasis also changes. In some cases the laws and regulations are there to help the economy by encouraging future investment, and sometimes they appear to be more focused on merely increasing this year’s tax revenues. To plan properly, entrepreneurs must be up to date with tax law and with current discussions on public revenue needs and possible taxation, so this year’s sound investment, or this year’s sensible expenditure does not become a future year’s greater tax liability.
Once the business has the most effective tax reduction strategies and processes in place, it must stay focused on them. Decisions must reduce tax liability, not miss an opportunity or change “the angle of flight” so the principles and processes stop working altogether.
Tax planning is important if businesses are to employ their financial resources wisely to minimize future liability. Planning, on its own is one thing. It is just as essential to base the planning on sound advice, to implement the right systems, and to keep using those systems.