Spring has sprung, and we are all excited about the warmer weather and longer days. But for all its sunshine, spring also means tax season. Tax compliance and tax planning are essential for long-term success regardless of your industry or company size. And if you start early with comprehensive tax planning throughout your fiscal year, tax compliance will no longer be such a stressor.
In this blog, we’re taking a closer look into tax compliance and planning and their differences so you can optimize your company’s tax processes. We review several of the top tax compliance concerns for businesses of all sizes and offer some tips to help your business better plan for the tax season ahead. By shifting from basic tax compliance to creating a comprehensive tax plan, you can save significant money for your business and rest easy knowing you’re fully tax compliant.
What Is Tax Compliance?
Tax compliance refers to simply following the rules set forth by the IRS and other tax authorities enforcing the rules for state and local taxes. Tax compliance encompasses understanding your tax obligations and completing the correct paperwork. However, when you’re busy running a business, trying to stay on top of a rapidly changing tax nexus is extremely difficult. Your accountant should be able to handle tax compliance quickly, so you don’t have to spend any time worrying about the potential implications.
What Is Tax Planning?
Tax planning is different from tax compliance in that it involves a year-round strategy to reduce tax liabilities. Tax planning requires an in-depth understanding of both your tax situation and how it applies to state and federal laws. Tax planning also requires being able to project both business and personal tax liabilities as well as the solutions that will help you avoid potential tax pitfalls.
The best tax accountants believe that tax planning must take place throughout the year, while tax compliance only occurs during the spring. Tax planning must occur no later than the fall of the tax year. Most tax minimization opportunities are still available as long as the year isn’t over. However, the sooner you start planning, the fewer things you leave to chance.
Tax Planning vs. Tax Optimization
Tax planning and tax optimization, while related, serve distinct functions in financial management. Tax planning is a broader approach involving a comprehensive strategy to minimize tax liability within legal boundaries. It encompasses long-term financial decisions, like investment choices, retirement planning, and timing of income, with the goal of maximizing after-tax income while ensuring compliance with tax laws.
On the other hand, tax optimization is a subset of tax planning, focusing specifically on investment-related decisions to achieve favorable tax treatment. This includes strategies such as selecting the right types of investment accounts, identifying asset locations for tax efficiency, and harvesting tax losses. Both tax planning and optimization are essential for effective tax management, but tax planning addresses overall financial health, while tax optimization zeroes in on maximizing the tax efficiency of investments, all within the framework of legal compliance.
How Is Tax Compliance Different from Tax Planning?
Tax compliance and tax planning differ in their approaches: compliance involves adhering to tax codes, a reactive process, while tax planning is proactive, focusing on leveraging changing tax codes to save money. Tax planning considers various scenarios to maximize a company’s tax benefits, asking questions like whether the company is utilizing all available deductions or leaving money on the table.
This proactive approach is essential in the U.S.’s self-reporting tax system, where it’s up to individuals or companies to claim all eligible deductions and credits. The IRS won’t notify taxpayers of missed benefits, so consulting with a skilled tax planner can prevent overpayment and ensure the most effective tax strategy.
Top Tax Compliance Concerns for Businesses
Personal tax compliance is one thing, but ensuring your business is tax-compliant is a different beast. There are many concerns that business owners need to be aware of when it comes to making sure that their business is tax-compliant. Of course, these issues vary depending on the location of your business, how you structure your taxes, and your industry. However, having effective accountant services and tax compliance management is one surefire way to address any tax compliance concerns.
Some of the most common tax compliance concerns for businesses of any size include:
· Income tax: From the largest corporation to every individual, every entity must pay some form of taxes on income earned during that year. The location and structure of your business will determine which specific tax laws apply when filing your income taxes. It’s also important to consider how you report profits and losses. For example, some businesses may choose to pay their income taxes on a quarterly basis to reduce the overall amount that is due when filing their yearly taxes.
· Determining estimated taxes: This refers to how businesses pay taxes on any income not subject to withholding. This may involve income from self-employment, interest, or dividends. Failure to pay any of these taxes may put your entire business at risk for non-compliance.
· Employer identification numbers (EIN): Immediately after registering a business, business owners should prioritize getting an EIN, which serves as a federal tax ID number. This number is essential for tax compliance.
· Charitable donations: Businesses and individuals can receive tax deductions for making charitable donations. You may even be able to write off certain expenses related to that donation, such as travel used for volunteering. Failing to report charitable donations will not necessarily cause tax compliance issues, but it does leave an opportunity on the table to relieve your tax burden.
What Sort of Opportunities Exist for Tax Planning?
Precisely determining what your business’s tax planning strategy should be depends on your industry. It is difficult to pinpoint your specific tax planning opportunities without knowing the ins and outs of your business situation. That’s why the tax planning process is so important. Business owners should consider the following elements when devising their tax plan:
- Investment incentives
- Business incentives and credits
- Export incentives
- Income planning
- Green energy incentives
- Hiring incentives
5 Tax Planning Tips for Your Business
Ensuring your business is ready for tax season should be a top priority for every accounting professional and business owner. Tax planning is not one-size-fits-all since every company has different financial goals and needs. Yet, general tax planning tips can help in almost any tax situation.
Here are some tax planning tips for your business:
1. Invest in business equipment and supplies: At the end of your fiscal year, you can reduce your taxable profits by purchasing business-related supplies and equipment. This is a common strategy that can help reduce the taxes you owe in one year and is especially ideal if you predict to have higher taxable profits on the horizon. It’s all about the preparation.
2. Prepay on future services: Similar to the suggestion above, you can also improve your tax planning by prepaying on future services, such as business subscriptions, digital tools and platforms, business insurance, or professional memberships. Some businesses may even prepay their rent to reduce their taxable profits that year. Of course, this is only a viable tip if you currently have sufficient cash flow to make these payments.
3. Accelerate income or defer earnings: Your business can get creative with year-end revenues in a few different ways. One method, known as accelerating income, refers to a method of claiming revenues early so that they can be included in your current tax season.
This method is primarily used when businesses claim expenses that they believe will be at a lower tax rate–saving your business money in the big picture. You may also opt for deferring earnings, which means you’ll push back certain income into the next taxable year to provide your business with some tax relief in the present fiscal year. This method can save you money if you anticipate your next year’s taxable revenue to be significantly lower.
4. Leverage bonuses and retirement contributions: Receiving a bonus at the end of the year isn’t always just about holiday cheer. End-of-the-year employee bonuses or retirement contributions can enable you to take advantage of certain tax breaks that are available on these funds.
5. Be aware of changes to business tax law: Business tax law is complex as you need to adhere to federal, state, and, at times, local tax regulations. On top of that, tax laws and codes are constantly changing. To keep up and ensure that your business is tax compliant and taking advantage of any available tax breaks, working with an experienced team of outsourced accountants is ideal.
Effectively Plan for Tax Season With Outsourced Accounting Services
Tax day may be April 15th (most years), but that doesn’t mean you should wait until spring to begin your tax planning and preparation. By shifting from basic tax compliance to thorough and strategic tax planning, you’ll feel confident when it comes to tax compliance for your business. By planning ahead and utilizing certain tax strategies, such as accelerated income or deferred earnings, you can even save significant amounts of cash for your business.
Here at Fully Accountable, we’re here to help you prepare for tax season and ensure that your business is up to date on relevant tax codes and completely tax compliant. To do so, we offer a full range of outsourced accounting services, including strategic tax planning and tax compliance services, so that you can focus on growing your business. Interested in optimizing your accounting services? Contact us to learn more about the benefits of outsourced accounting. Together, we can find financial solutions to ensure that your business will have its best fiscal year to date.
Fully Accountable is an outsourced accounting and fractional CFO firm that specializes in ecommerce accounting for online businesses. As a Inc 5000 fastest growing companies award winner, our diverse team of accountants, bookkeepers and CFOs can help you improve your cashflow and effectively manage and grow your bottom line.
