What Is Tax Planning?Tax Planning
Let's get real honest with each other for a minute. I hate Taxes and so do you. For anyone who has ever really paid them, I doubt anyone says they like it. You may know why you have to do it, but that does mean you like it.
This why you need Tax Planning...
Paying Taxes causes pain. For most business owners cash flow is the lifeblood of their business. If feels like a warm blanket around us on a cold night. When we pay taxes and our cash flow is hit, it can lead to pain and panic.
This is why you need Tax Planning...
For most business owners, they have a CPA or EA or accountant that helps them with taxes.
The service is simple:
1. Send in your documents and financials
2. Accountant prepares tax returns
3. You review this return ( always surprised by the amount due) and maybe finding a few tax savings deductions
4. You pay your tax bill and say "I hate taxes" .... The End.
I know that routine because I have done it in my firm too. It works, your taxes get done and the accountant makes money, and you feel good that you are doing everything you can to save money... Right?
This is why you need Tax Planning....
What is Tax Planning?
Simply put, tax planning is the calculation and planning for FUTURE taxes. It takes place BEFORE the tax returns need to be done each spring. It is meant to give you peace of mind about what the taxes are going to be (no more surprises) and what you can do about them ( how do I lower this bill).
Tax Planning must take place during the year you are planning for. That means planning for your 2015 tax returns (which you will prepare by April 2016) must be done during 2015. Get it? We are always kind of guessing at the future , but I will show you later, its not really guessing..
Tax Planning consist of 2 parts:
1. Tax Projections
2. Tax Strategy
Tax Projections- The calculation of what both your business tax and personal tax will be at year end. It is a complex calculation because it is like doing the tax returns before the year has ended. Let me give you an example:
Its July 1, and 6 months of 2015 has passed and you want to run tax projections. Because you only have 6 months of business data, you have to calculate what your income and expense will be at the end of the year.
To do this, we use a process called "interpolation". It means using a known set of data points to predict or estimate a new set of data. Its a fancy way of estimating but works somewhat better.
Once we have "interpolated" what your financials will be at year end, then we have to run a tax return simulation on them. So that we see all the adjustments, depreciation, disallowed expenses, ect.
Finally we get what your business taxable income looks like, then we have to do the whole thing for your personal taxes! Exhausting is what it is, but when you are done...You have a very accurate , very valuable estimates of what your future taxes are going to be.
And usually when a client of mine sees them they don't find it very exciting at all.
Again, we are back to "No one likes to pay taxes, no one.."
Tax Strategy- Once you have the tax projections done, now comes the more fun part. Tax Strategy is applying known tax saving rules and methods (both simple and complex) to your specific tax projections that will tell you what actions you can take to reduce your taxes.
I always tell clients " I can get your tax bill down to $0, the real question is : Are you willing to do it?"
And that is true, in 99% of cases we know how to bring your tax bill down to nothing, but it is much easier to say than do.
The key to massive tax reduction is taking steps during the year. Once New Years Eve hits, the game is over. That is why waiting to save on taxes until you are sitting in the tax office does not work. You must plan during the current year.
There are tons of strategies that must be implemented during the tax year. Income Deferment, Insurance Strategies, Self Rental , Expense Acceleration, Sec. 179, and much more. In fact only 1 or 2 of our 88 strategies can be implemented after Jan 1.
So Why Are You Just Hearing About Tax Planning?
Most of the time people tell me that they do tax planning. When I ask if they run tax projections and have a meeting with their accountant about the results, the answer is always no.
Its not your fault or the accountants fault, before now this kind of work was very expensive to do. Most tax projection services cost in the range of $1K to $5k to do it right. This is just not affordable for small business owners.
Believe me, your accountant wants to do tax planning as much as you do but its hard without the right set of tools.
Also, accountants normally care much more about accuracy than they do abut how much tax you are paying. I know that may come as a shock (or maybe not if you have had this discussion with your preparer), but with a focus on accuracy and your focus on tax, there is a disconnect.
If should be a little clearer now why you need tax planning, and I can tell you in most cases getting your taxes down 20%-50% is very possible if you take just a little time to work up the plan.
If you want any easy solution, it is using our software Tax Planner Pro (www.taxplannerpro.com) to run your projections and identify your strategies.
With Tax Planner Pro you can sync your bookkeeping software to our app and it does all the work for you.
Not only will you know what your taxes are going to be, you will have suggestions of how to lower them, and in fact , how to get them down to $0.
It is free to begin and our largest package is only $9 per month billed annually. You will save that much in the first 5 minutes of using it.
If you have any tax planning questions, please ask them in the comment section listed below, as a CPA with more then 15 years experience there is not much that I can't answer for you. I would love to help!