Posted: June 11, 2009
Six great ways to optimize your tax strategy
Does your tax plan fit your business life cycle stage?Rick LaFave
This summer is a great time for you to think about what stage of the business life cycle you’re in, and if your tax strategy is aligned with your current needs.
The recession has pushed many people to consider starting their own businesses in the last several months. For small businesses that predate the recession, it’s forced most of them to tighten their belts and be smarter about their financial strategy. Finally, no doubt many small business owners have taken their lumps during the economic downturn and are considering an exit strategy.
Whatever stage of the business life cycle you’re in, there’s a good chance you could benefit by revisiting your tax strategy. The recession has reminded many of us that there’s no substitute for a reasoned approach to financial planning and taxes – which are one of the biggest expenses for most small businesses.
If you’re about to start a business, look ahead when choosing a legal structure
Some soon-to-be small business owners have a decent grasp of whether they structure their business as an S-corporation, an LLC or LLP, a sole proprietorship or another entity. But what we often see is that many owners set up a legal structure that suits them now – but may not suit them down the road after adding partners, employees, board members or considering an exit strategy. Make sure the entity you choose is a fit not only for where you are now, but also for where you envision yourself in several years.
Examine your options for hiring contractors vs. employees
This is one of the most-asked tax questions for people starting a business. Many business owners want to classify their help as contractors, which allows them to avoid paying taxes and dealing with payroll headaches. But, particularly with virtual offices so commonplace in today’s work environment, it can be tricky to determine which title fits. The IRS will make a determination for you through Form SS-8, but it can take six months to get an answer. It’s best to speak with a tax expert.
Set up a payroll tax plan
If you determine that you have employees, and not contractors, this is an incredibly important step. Payroll can be a difficult and painful process if you don’t have a strong plan in place to simplify things. It’s best to get this established right away.
If you’re running a small business: Think about future major purchases
Should you lease or buy equipment? While this decision generally involves a host of non-tax-related issues, you should think about the tax consequences of these types of decisions. And what about depreciation? You may be tempted to fully expense a piece of equipment in the year of purchase through Section 179 – but then again, it may make more sense to claim the depreciation if you can’t take advantage of the deduction. Without question, it’s a lot easier to study these things before the pressure is on due to an emergency equipment purchase.
Reduce tax burden through profit and loss forecasting
While profit and loss forecasting is used to make purchasing and HR decisions, it should also be utilized as a crucial tool to reduce tax burden. Gaining a better understanding of future expected tax liability – and determining how various courses of action impact your taxes – is an essential element of tax strategy. If you’re not looking ahead with this in mind right now, you should meet with a tax professional to make this part of your company’s forecasting process.
If you’re thinking about exiting your business: Figure out your retirement plan
This piece of advice holds true both for the business owner, and for the company’s retirement policies, as there could be significant tax benefits available for employers who set up retirement plans for their employees. And as for your own plan, you may be able to move money out of your business on a tax-deferred basis by contributing to your own plan, but this can be confusing territory if you’re trying to figure it out alone.
It’s true: April 15th, 2010 seems like a long time from now. But whether you’re just starting a business, you’re thinking about getting out, or somewhere in between, the summer is a great time to think about optimizing your tax strategy. You’ll be glad you did.
Rick LaFave is a principal with H&R Block Tax & Business Services (formerly Vantive Partners) in Centennial. With 11 offices in the Denver area, H&R Block Tax & Business Services specializes in providing clients with a proactive approach to individual and business tax strategies. Visit www.HRBTaxandBusiness.com for more information.