Sales growth, expansion, and changes to existing footprints are certainly good problems to have, especially in a bear market. However, they present tax challenges. For instance, you may need to coordinate tax requirements in additional geographics, and track new assets. They also present opportunities. Consider how new taxing jurisdictions don’t just collect monies; they compete for business with neighboring states and peer markets. And, accordingly, they offer a range of programs to attract new “job creators” to the region. You may find yourself in a positive position of being eligible for everything from property and sale tax relief, to grants for training.
These considerations further reinforce the links between taxes and the greater viability of your business. They also underscore the value that can be harnessed by accounting for tax requirements and opportunities as part of your broader, holistic financial planning.
What are tax projections?
Projections are probably the most common tool used by tax planners. Historical data, projected income, and expenses are used to project taxable income. In this manner, tax projections may be used to:
Determine tax responsibility required before year’s end.
Avoid penalties associated with underpaying.
Stay on track, avoid penalties associated with late payments.
Project future tax obligations.
Compare and contrast different types of tax savings vehicles.
Compare and contrast different tax deferral methods.
Consider pending changes related to tax law.
Avoid tax surprises, whether you’re just starting up or beginning to turn a profit.
Generally, the analysis that is required to create your tax projections can be prepared by your partners at O’Donnell, Ficenec, Wills & Ferdig. Planning is valuable because it may lead to savings. This savings builds on top of opportunities that we identify and harness to reduce your tax liabilities. This can easily add up to thousands of dollars.
How to complete tax projections
Basically, your tax/accounting partner will need to collect and review information such as:
Business income
Other income
Tax withholding
Deductions
Credits
Calculate self-employment or SS/Medicare taxes (for business owners)
“Other income” may include things like pensions, dividends, AMT, winnings or monetary awards, interest gains, in addition to business income. The information could look something like this:
· Estimated business income for tax year. What do we mean by this? Well, you can use income from previous years or estimate your income based off of the amount that you have made thus far (to the current date) and what you typically expect or for the balance of the year, based off of specific factors for the year or historical precedent.
· Estimated business expenses, again previous years might be used as a “guide” or year-to-date expenses may be applied to forecast for the rest of the year.
· Estimated personal tax liabilities. So, this involves accounting for personal income, deductions, credits, exemptions, and federal income taxes that might have been withheld from your personal income. Akin to business income and expenses, prior-year tax returns can inform the present situation or you can use YTD data to project the year.
· As owners of partnerships, LLCs and S-corps, you aren’t an employee of the business. But, since you receive payments periodically, they are added to personal tax returns. In turn, these payments are subject to withholding. Estimated taxes may need to be paid, and the process is largely similar to the above.
These bullet points provide a general idea as to the types of information your tax preparer will request, and may analyze to render tax projections. Your accountants can also use software to supply information that is easy-to-follow, akin to how a tax return looks. As a tax and accounting consultant, OFWF is able to present the information that is projected to you in a way that’s clear and leaves no room for confusion or misinterpretation.
We can then schedule a time to go into greater depth over the strategic part of the tax projection services – planning for the options or paths to pave the most favorable tax results. Step-by-step, actionable instructions are provided that show what items need to be completed to stay on track with these strategic options and methods, and to meet the goals discussed during your tax planning meeting. Reforms, notably, those connected to the Tax Cuts and Jobs Act (TCJA) (such as the 20% Qualified Business Income Deduction) must be accounted for in these projections and planning. These changes can affect your tax liabilities, and how much you ultimately pay (or save).
Such projection, the value of foresight, also affords the opportunity for us to identify tax adjustments or changes such as those mentioned and input those into planning. We can evaluate how these changes may affect your business and individual tax situation – and not just for the upcoming tax season, but for the season(s) after that. Tax-saving strategies might include:
Shifting deductions from one year to another. So, it’s taxed at a lower rate.
Moving income from one year to another. So, you can have a better tax benefit.
Splitting income among several family members and/or legal entities. That away, you can have more of your income taxed at lower rates.
Using some investment vehicles to defer tax liabilities.
Investing in those vehicles where income is not subject to federal or state income taxes.
For even more detailed insight, the American Institute of CPAs developed its report on “Analysis of a tax return for financial planning opportunities.” They created a checklist of information that is used to inform financial planning under the categories of “dependents and filing status,” “income,” “retirement plans and distributions,” “income through an LLC, S Corp, or partnership,” “itemized deductions,” “AMT,” “credits,” “occupation” (special coverage needs, such as disability insurance for surgeons and medical professionals), and “other considerations.”
During these engagements, strategies such as “bunching” charitable deductions in alternating years might be discussed to take advantage of higher standard deduction and limitations on itemized deductions under the TCJA. Associated projections might be run to show the potential benefits. Generally, AICPA emphasizes the importance of considering multi-year planning opportunities and potential tax rate changes. Moreover, there is the issue of “timing” the future income and deduction to result in favorable, long-term tax liability. There is a lot more you can manage and control than meets the eye!
Rethink the way you perceive “tax season.” It’s not merely a “season” or event that you dread; it’s a strategic opportunity that, like other strategies that bear fruit, must be cultivated on an ongoing basis.
Our tax professionals look forward to hearing from you.