Taxes and business strategy should be created together. However, most business owners don’t have a tax plan that is based on their business plan. If you’ve read how 55 Fortune 500 companies paid no taxes, including Nike and FedEx, it’s because of strategic tax planning.
When your accountant helps meld your business and tax plan together, you save money by reducing your taxable income.
Let’s take a look at how your planning approach can be altered to save you money in 2022 and beyond.
Taxes and Business Strategy A Planning Approach
No one wants to pay more on their taxes than is legally necessary. In fact, it’s fair to say that your business should deduct every expense possible. However, with tax planning services, it’s possible to strategically reduce tax burdens to meet your business goals.
Since tax deductions rely on your business spending money, it’s crucial to have a plan in place that doesn’t impact cash flow too much.
Note: Other tax-reducing strategies, such as entity selection, can save you money. However, year-to-year, most savings will come from deductions that require you to save money.
Business Planning and Tax Strategies
A business plan helps you:
- Understand how much money you can spend during a tax year
- How much cash you’ll need in a given year
If you plan for an acquisition in the coming year or need to invest heavily in technology, you may need more free cash flow and will need to adjust your tax plan accordingly. You may have a higher tax burden the prior year to keep cash flow healthy and then invest heavily the following year.
Often, business owners will try to maximize their tax deductions and end up sabotaging their goals in the process.
Tax planning helps you understand:
- When it’s best to invest to reduce taxes
- Strategically take deductions
Your business goals must align with your tax plan. If you try to create legitimate deductions to spend less on taxes, you may end up being “cash-starved” and miss out on business opportunities in the future.
It’s a delicate balance between spending to reduce taxes and meeting your business goals.
Additionally, your tax planner may find it better to take a tax credit this year versus next because your business is planning a product launch or suspects a slower first quarter. When you have a balance between tax and business planning, you’re able to control your cash flow better and meet your goals.
How can you begin to align your business and tax plan?
Create a 1-, 3- and 5-Year Plan
If you envision your business’ future, what do you see? You need to have a vision for your business before creating a plan to reach your goals. Once you have a vision, it’s time to create the following plans:
- 1-year plan
- 3-year plan
- 5-year plan
Every year, you want to work towards your vision for your business. For example, perhaps you want to reach 5 million in sales in the next five years. Your plan may include:
- Year 1: Create a new innovative product, and hire a marketer, sales rep, and five other employees. Small milestones this year may be prototype review, product testing, manufacturing, and launch.
- Year 3: Release version 2 of the product and offer products that fit together with the existing product. Perhaps your team will grow from 7 people to 20 this year.
- Year 5: Continue capturing market share, fulfill local government contracts for your product, hit $5 million in sales, etc.
However, every year and goal should be compromised of small goals that must be met. You need to make $1,$2,$3, and $4 million before reaching your $5 million in revenue goal. Creating plans for how each year will help you reach the vision for your business is going to be crucial to your success.
Additionally, all of these milestones will require resources. You’ll need to have an understanding of:
- Resources required each year
- Cash needed for each year
Of course, this is just a simple, fundamental overview of your yearly plans. Many of the 20% of businesses that failed during their first year of operation didn’t have a solid plan. You also need to plan for “what-if scenarios.”
Perhaps your product flops. How will you recover?
When you create an in-depth plan that accounts for all of the “what-if” scenarios, you’ll have a much better sense of how to reach your goals. For many businesses, smart tax planning and strategizing can help free up cash to meet milestones.
Create a Tax Strategy
Tax strategies for reducing your tax burden must be done strategically. Unfortunately, there’s no one-size-fits-all approach to creating a tax strategy. You may find that a carryforward offers more cash flow stability in the future, or you may decide not to carry a loss forward.
Working with a tax planning professional will provide you with insights and strategizes to leverage the tax code to work best for your business.
Your tax strategy will consider the following:
- Visualization of your results to show what the tax strategy should allow you to do to grow and expand your business.
- Entity map, which includes an abundance of facts about your business, income, finance, and how taxes will impact your business goals.
- Deduction lists, which will include the tax benefits that you can leverage in your operations to save money.
Once you have a tax plan in place, you can be confident that you’ll be able to keep as much cash flow in your business, make smart tax moves and continue to grow your business. As your business grows, shrinks, or makes major changes, both plans should be updated to reflect these changes.
For example, businesses needed to adjust their spending in 2020, and 69% of companies reduced their ad spending.
Ad spend is a tax deduction and generates business, but it’s better for these businesses to rein in spending even if it leads to a lower tax burden. Why? They needed to maintain steady cash flow to try and keep their business running.
If you would like to create a tax and business strategy that helps you save money, we can help.