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It's time to Prepare Your Year-End Tax Plan

Regardless of whether you filed your business and individual tax returns by the original due date or filed them just before your last extension expired, now is the time to make sure your tax plan is completed for the current fiscal year. Most of the year has been booked and you should have enough financial information from your business and personal records to complete your current year tax plan. The objective of the tax plan is to minimize, to the extent legally possible, one of the most significant expenses a business owner will face—corporate and personal income taxes.

Documents needed to prepare your tax plan

• Current and Accurate Company Financial Statements

• Current Personal Earnings Statements

• Current Schedule of Federal and State Taxes Paid

• Projected Company Financial Results for Remainder of Year

• Projected Personal Earning for Remainder of Year

• Projected Federal and State Taxes to be Paid During Remainder of Year

To create your year-end tax plan, you will need an accurate set of financial statements through October or November. Along with the corporate financials, you will need to analyze your year-to-date personal earnings, federal taxes paid, and state taxes paid. Lastly, you will need to project the financial results of the company for the remainder of the fiscal year and your remaining personal earnings. The combination of the above financial information will become the foundation of your current year’s tax plan.

When building a tax plan, what are the key components of corporate structure that need to be considered?

• What is the entity type?

• Is taxable income subject to corporate income tax or does it pass-through to shareholders?

• When is the tax year-end of the company?

• Is taxable income calculated on a cash basis or accrual basis?

When building a tax plan, what are the key components of the business owners’ personal financials that need to be considered?

• What are the business owners projected amounts of income from other sources?

• What additional itemized deductions are available?

• How will the dreaded Alternative Minimum Tax (AMT) affect the final tax bill?

• Has the business owner made adequate tax payments to avoid penalties and interest?

Once the above information is assembled into a financial model, your tax advisor can assist you in taking the appropriate steps necessary to minimize your current year’s taxes. The primary objective of a tax plan is to defer taxable income into future tax periods while minimizing the taxes paid by an entity or individual over time. There are many strategies that can be utilized. Based on your specific situation, some strategies may not be appropriate. For cash basis taxpayers, taxable income deferral can be accomplished by accelerating expenses into the current tax year or deferring income into future tax periods. Keep in mind that there are situations when deferring taxable income is not the primary goal (i.e. based on alternative minimum taxes or when tax rates are expected to go up in the future – this could be a real issue in 2012!).

Examples of tax strategies that can be proposed by your tax advisor include

• Accelerating the occurrence of expenses or of the issuance of cash disbursements

• Attempting to slow down the revenue recognition process or cash receipts cycle

• Accelerating expenditures for capitalized assets

• Adjusting a firm’s bonus plan to ensure it is tax efficient

• Implementation of a tax efficient retirement plan

• Evaluation of personal earnings as compared to company earnings to ensure tax efficienc

• This measure should consider retirement plan factors as well

• Acceleration itemized deductions to minimize personal income taxes

• Deferral of certain itemized deductions to decrease the Alternative Minimum Tax

It is important that your tax advisor work in conjunction with your internal accounting staff to ensure that the plan is fully understood and executed. Successful business owners understand that they are ultimately responsible for managing their corporate and personal income taxes with the assistance of their tax advisors. They will undertake this project with the same vigor that they manage other major expense categories like payroll, rent, and direct cost of sales. The consequence of inadequate tax planning includes overpaying income taxes, penalties and interest, or paying income taxes too early. These consequences can have an adverse affect on cash flow and ultimately the financial health of your company. Make sure you consult your tax advisor at least annually or when there are material changes in the business to ensure your tax plan is up to date.

Source: Ted Rose is the President of Rose Financial Services, based in Rockville, MD. If you have any comments or questions, he can be reached at info@rosefinancial.com or 301.527.1130.

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