I may get a ribbing from colleagues about this "great tax planning idea," but I believe a strong house is built on a solid foundation.
In this case, the tax planning "house" must be supported by reliable information from your business' accounting data.
So, my tax planning idea is to ensure you develop and maintain an effective accounting function! The goal of tax planning is to minimize the total tax cost of conducting business.
To be effective, the tax planner must have financial information that is correct, complete, and timely - the end result of a carefully planned and diligently operated accounting function.
The planner also needs to understand the business itself, and the industry in which the business participates.
The planner uses this information to develop plans that take advantage of opportunities presented in law and regulations, to create or enhance a business' competitive advantage, to free cash for more profitable uses, or to achieve other goals of the business.
The positions you take in your business' tax strategy will bear fruit in the transactions that occur after the plan is implemented.
Under scrutiny from federal, state, or local tax authorities, your records need to achieve these goals: * Distinguish between taxable income and non-taxable receipts.
* Defend deductible expenditures or insurance valuations.
But the reasons for good recordkeeping extend well beyond tax matters.
For example, a carefully planned and properly employed accounting system can: * Lay the foundation for modifying your business structure; * Help determine the timing of capital asset purchases, repairs or replacements; * Aid managers to decide upon employment versus outsourcing; * Help identify opportunities for changes in lines of business or target markets.
* Justify the asking price when offering your business for sale or offering equity interests to others (public or private).
* Satisfy existing loan covenants or new loan application requirements.
Some factors to consider when designing your accounting system include: * Documentation and retention requirements imposed by federal, state, or local governments * Standards in your trade or profession * Key points in case law related to your business' issues * Lenders' and insurers' documentation requirements * Main points of interest to prospective buyers or investors How best to implement this "great tax planning idea"? Business owners have some options, each having advantages and disadvantages.
One option is to employ bookkeeping staff and financial managers.
Under this option, the employer decides qualifications and compensation details, and controls work schedules and prioritization of tasks.
Employees typically develop knowledge and methods specific to your business, gaining efficiency with experience.
Also, the employer controls the infrastructure used by employees (hardware, software, procedures), and the release of information, records retention policies and procedures.
Potential negatives include increased administrative effort to ensure compliance with employment and benefits laws, and the costs of maintaining or upgrading employees' knowledge and skills, plus furniture, equipment, computer resources.
Another option is to outsource some or all bookkeeping and financial management tasks.
Here, the business owner negotiates the services needed, and their cost.
The service provider must provide infrastructure and training for workers, and comply with employment and benefits laws.
However, the business owner has less control over scheduling of work and quality control.
And, the service provider may charge extra for expedited or additional services.
Also, the service provider may disclose confidential information without the permission of business owner, unless specifically prohibited from doing so.
Of course, a productive accounting system produces records - and these need to be stored for future reference.
It is now permissible to produce and store your accounting records electronically, and you should try to do so as much as possible.
One important caveat: make sure the method you use to store records will permit you to easily retrieve them several years later! If you outsource some or all of your accounting functions, be sure the service provider will retain your detailed information in a manner accessible to you for at least three years after the due date for each year's tax return.
Or, obtain a copy you can store and retrieve.
The federal income tax code and supporting regulations are complex.
This complexity presents compliance challenges and planning opportunities.
No matter your type of business, building and maintaining a solid information base is key to your ability to avoid unnecessary taxes, penalties, and interest with thoughtful planning and effective implementation of all your other tax planning ideas! John Mitchell, a certified public accountant, works with businesses in Reno and Sparks.
