“Taxes are what we pay for civilized society,” former U.S. Supreme Court Justice Oliver Wendell Holmes, Jr. is credited with saying. That’s only half the quote. You must only pay the amount required by law, no more. Tax planning is critical so you must only pay the amount required by law, no more. Efficient tax planning uses financial strategies to minimize your tax liabilities and help ensure you pay the lowest amount you are legally required to pay.
Why is Tax Planning Important?
The goal of tax planning is to reduce overall tax liability so that only the amount actually owed is paid — which is often much less than one might think. Many business owners are surprised to learn about the credits and deductions that are available to them. With adequate tax planning, a business owner can ultimately put more capital back into their company to further its growth.
Whether the plan focuses on the owner’s individual tax situation or specifically that of their business, the following objectives may be achieved with comprehensive tax planning:
- Saving time and preventing errors during tax season
- Reducing the amount of taxable income
- Enabling future growth of the business
- Claiming available tax credits
- Controlling the time at which taxes must be paid
Having a tax planning strategy in place can help entrepreneurs make well-informed business decisions that have a long-lasting impact. Not only can it provide a business owner with the knowledge to make financial projections, but understanding their tax obligations can also give them a better idea of how to make changes to their business operations.
Types of Tax Planning Strategies
There are a number of tax planning strategies available to business owners. Critically, the tax planning process takes numerous considerations into account, such as the timing and size of purchases, opportunities for deductions or credits, and planning for expenses. The tax planning process can also play a role in the investments and retirement plans you select — these should complement the overall tax strategy to create the best possible outcome.
Some common tax plans for businesses can include:
- Defined benefit plans — A defined benefit plan is an employer-sponsored retirement plan that can be used by businesses of any size. Employers can claim a tax deduction for contributions and employees receive fixed, pre-established retirement benefits.
- Installment sales — Installment sales are defined by Section 453(a) of the Internal Revenue Code. This provision allows a business owner to accept a series of payments over a period of time for the sale of their business, resulting in a deferred tax liability.
- Forming a captive insurance company — By forming a captive insurance company under Section 831(b) of the Internal Revenue Code, a business owner can tailor a tax-deductible insurance policy that fits the needs of their company.
- Utilizing the Section 1202 process — Federal tax on capital gains is not required to be paid from specific small business stocks under Section 1202 of the Internal Revenue Code.
- Claiming the research and development tax credit — The research and development tax credit can be used if a business contributed in some way to innovation for the good of the public. If a company designs new products or makes improvements to existing processes, this tax credit may be available.
An individual business owner may employ many other deductions available under the tax code. For instance, the IRS permits deductions for business meals, maintaining a home office, using a vehicle for business purposes, and many other business-related expenses. Business owners should keep accurate records of their expenses to ensure they benefit from every possible deduction.
Contact an Experienced New York Business Attorney to Learn More About Tax Planning
If you’d like to learn more about what is tax planning and how it can help your business grow, it’s important to consult with an experienced business attorney. Brinen & Associates has extensive experience assisting business owners with tax planning matters and works with them to develop a comprehensive strategy to minimize their liability and maximize their profits. Call (212) 330-8151 to learn how we can assist you.