The Importance of Tax Planning in 2021 & Beyond
President Dwight D. Eisenhower once said, “Plans are nothing; planning is everything.” In other words, your plans must constantly be evolving to match the ever-changing landscape of life.
As a seasoned tax professional, this quote has never been more relevant than it is today. The business landscape is rapidly changing, and the future becomes more blurred as businesses and individuals battle new challenges on a seemingly daily basis.
One of those challenges is not only keeping up with the rapidly changing tax laws but being able to effectively apply them to your business and personal tax situation to maximize the amount of money that can be saved and reallocated to other, more important, areas of either your business or your personal finances.
In this post, we’re going to take a critical look at the concept of tax planning and how to evolve your perception of the planning process and create a better strategy for your business.
What Exactly is Tax Planning?
Most people think that tax planning is just a rough draft of your tax return that we use to project out what your tax liability is going to be in April and how much money you should be setting aside now to pay that liability. Although this is part of the tax planning process, it is in fact a small piece of it.
Of course, we want to avoid any surprises and reduce penalties when it comes time to pay your taxes, but tax planning is and should be so much more.
We like to think of tax planning as your tax playbook. For us, the tax planning process starts as soon as we meet you. We take the time to learn more about you as an individual, your business, and your goals. We assess things like your risk tolerance level, your profitability, and whether you like to owe or get a refund at the end of the year. We use information like this to build a tax plan that fits within those parameters. For example, your goal may not be to pay the smallest amount in tax legally possible but to reduce your exposure to being audited by the IRS. Perhaps your goal is to show your business as more profitable to achieve recognition in your specific industry. Our goal is to create a plan to ensure that we do everything possible to help you stay on track towards your goals.
Is Tax Planning Included in Traditional Tax Services?
When we first talk to new clients, one question we get asked is, “Why would we pay extra for tax planning?”
This is a great question. You only take your car to the repair shop when it’s broken, so why should we be looking under the hood of your taxes when everything is seemingly running smoothly?
Many people do not realize that when it comes time to file your taxes, tax preparers are little more than historians during tax season. They take the information you provide and regurgitate it in the form of a tax return. Unfortunately, if the result of that tax return is less than desirable, there is little anyone can do to change it at that point.
Ideally, tax planning should be done throughout the year to maximize any opportunities that may arise and to start taking advantage of those opportunities as soon as possible.
The Old Way of Tax Preparation is Dead
Meeting with your CPA or tax preparer once a year does not work in today’s environment. There are too many changing variables to consider.
Each year, the tax law becomes more and more complex and with that complexity comes more opportunities to potentially reduce your tax liability arise.
Tax rates are constantly changing too. A perfect example is when the Tax Cuts and Jobs Act was passed and reduced the corporate tax rate from 35% to 21%. While this was common knowledge due to media exposure, not every change in tax rate is widely publicized.
Finally, consider the fact that we find new clients who have not practiced proper tax planning overpaying by anywhere between $5,000 – $20,000 annually! Depending on the size of your business this may not seem like a lot, but consider that over a 5-year period this could be close to $100,000 in tax savings. What it would mean if you had an extra $100,000 to invest back into the business? How would this extra cash inflow help?
No Tax Strategy Is Complete Without Strategic Tax Planning
We hope this article helped to demystify the modern tax planning process and highlight its importance in the life of a healthy business. Our mission at SmartBooks is to not only provide our clients with exceptional tax compliance services but to also ensure we are working collectively throughout the year to help them reach their goals.
In doing so, we feel that we are leaving a positive impact on not only our lives but our client’s lives, their employee’s lives, their client’s lives, and our communities as a whole.
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