If you own a business, you know that you must take certain steps to ensure optimal tax planning. Most often, the first step is gathering as much information as possible on how to prepare your taxes and reduce or eliminate any taxes due. However, there are many more considerations that need to be taken into account before deciding on the best course of action.
Tax Planning Challenges Faced by Businesses
Although tax planning is an important aspect of the growth and success of a business, it is not as simple as following a few steps. Because the tax planning process is complex, it must be approached with care to ensure you don't make any mistakes that could jeopardize your business's future.
As you pursue tax planning strategies for your business, here are six challenges faced by business:
Challenge 1 Your business is tiny. Tax planning can increase the effective tax rate for corporations by as much as 2 percent among corporations with an annual gross income of below $5 million. This may not seem like much, but when you are a small business, it can make a very big difference.
Challenge 2 Your business uses real estate as part of your product or service offering. If you own real estate, frictional taxes (also known as mortgage interest taxes) may apply to the rental income you receive from the property. These taxes are based on your net income (including depreciation) and can range from 4-10 percent of your gross rental income; this will likely increase the effective tax rate by 1-3 percent for real frictional taxes.
Challenge 3 You cross state and international borders. While corporations and partnerships file tax returns with the IRS, sole proprietors do not. For this reason, you may need to use a business structure such as an S corporation or a limited liability company (LLC) rather than a sole proprietorship to carry out your tax planning strategies.
Challenge 4 You have limited resources and time available to devote to tax planning. It is often difficult for small business owners to calculate the value of items such as depreciation and expenses, which can either save taxes or increase them depending on their current cost basis.
Challenge 5 Your business is not one you can easily relocate because of its physical location. While you can make business decisions based on tax advantages, it is difficult to move a business to save money on taxes if the cost of moving the company outweighs the potential tax savings.
Challenge 6 You believe that using a corporate structure could harm your reputation or undermine your own personal reputation.
How Can Tax Planning Help Your Business?
Tax planning strategies for small businesses can be complex and difficult to implement because there are so many variables and factors to consider when determining how to lower or avoid paying taxes. Having an experienced accountant or tax attorney assist you in preparing for taxes or helping with making important tax decisions is essential when you run a smaller business because no one understands the intricacies of the tax code like they do.