Getting Started
Tax Planning: More Important Now Than Ever! By Chad Zagar, VP and Managing Director of Financial Services THIS YEAR DEFINITELY HAS ILLUSTRATED THE NUMBER OF FACTORS INFLUENCING YOUR PROFITABILITY THAT ARE SEEMINGLY OUT OF YOUR CONTROL. AND WHILE THERE ARE MANY THINGS IMPACTING YOUR BUSINESS, YOU CAN GAIN CONTROL OF YOUR TAX SITUATION IF YOU PLAN AHEAD. WHETHER YOU BELIEVE YOU MADE LITTLE INCOME OR A LOT IN 2019, YOU WILL FARE BETTER WITH PRE-PLANNING. ADDITIONALLY, SINCE THIS IS THE SECOND YEAR OF THE NEW TAX LAWS, PLANNING MAY BE MORE IMPORTANT THAN EVER BEFORE!
It is important to understand the goal of tax planning is to minimize tax liabilities and ensure all available allowances, deductions, exclusions and exemptions are working together in the most tax-efficient manner, reducing the total income tax paid to an amount you are expecting. Tax planning does not remove obligations or change requirements, but can help eliminate any surprises at tax time. Effective tax planning helps businesses achieve their financial goals and plan for their upcoming needs. When done properly, it should lower taxable income, reduce tax rates, provide for greater control of when taxes are paid, and maximize deductions and credits whenever possible. To the right is a simplified illustration showing the importance of tax planning. In both scenarios, the two year combined farm net income is $150,000 (average of $75,000 per year). In Scenario 1, no tax planning was completed and a significant loss was recognized in year one. This led to the income tax benefit of adjustments and standard deductions being wasted and the taxpayer paying $7,535 more in income tax over a two year period than in Scenario 2. Effective tax planning, when possible, should avoid situations like the illustration on the right. Your Responsibilities While tax accountants are knowledgeable and generally well-versed in tax laws – they are not magicians, nor can they read minds. Therefore, it is critical you stay engaged in the tax planning process and provide the necessary information in order to receive efficient and effective guidance. A few tax planning tips: • Have your records in order: Having an accurate set of financial records is critical for
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a tax preparer to work with – preferably, not a shoebox of receipts. A computer program or a worksheet that reconciles back to your bank and debt statements is best. This is generally the first step in good financial planning and a piece that should not be ignored. If this is not something you want to do, it may be best to hire a bookkeeper or accountant to assist you. • Don’t procrastinate: Waiting until the last minute to get your records in order is a big no-no. Waiting until December to start your bookkeeping for the year leaves you scrambling to complete activities to help your tax situation. • Get off autopilot: It is not uncommon to see businesses make financial decisions that they shouldn’t have made because their books are not up to date. Examples include buying the same amount of prepaids as last year, or making a capital expenditure because you had to last year – only to find out that neither were necessary because you were in a different position than a year ago. • Nothing is irrelevant: Make sure you tell your tax preparer about all equipment purchases. For instance, if equipment is dealer- or manufacturer-financed, it may not show up in your bank accounts if no payment was made in the tax year. That can be a sizeable capital expenditure your tax accountant doesn’t know about unless you tell them. • Meet with your tax accountant early: Meet before the end of the year to discuss your current financial situation and what tax bracket you will likely be in. Allow enough time to bring in additional income if facing a net operating loss or to make additional purchases if your income is too high.