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Year-Round Tax Management Can Help Save Big Money
by Jeff Brandenburg

As a percentage, taxes are usually the greatest expense of a business. Because of this, proactive tax management is a year-round concern.

Maintaining communication with competent tax consultants throughout the year gives businesses the opportunity to continually review tax strategies, discover additional potential deductions and keep abreast of tax changes that could affect business planning. A business does not want to necessarily adjust its business strategy for tax savings purposes.

However, a company’s tax strategy should be consistent with its business strategy. This is best accomplished by regularly communicating to your tax consultant your business strategy, the major actions you have taken and the changes in your business environment. Most importantly, proactive tax planning guards business owners against surprises when tax time arrives.

It is wise to discuss ongoing operational decisions and their tax impact with your tax consultant. For example, the cost of developing new products or services, the cost of increasing advertising or the cost of purchasing equipment can be viewed not merely from a “what will it cost?” standpoint but also from a “how would the tax effect affect my decision?” standpoint. This gives a more complete and accurate basis for financial decisions.

A number of project-based solutions exist to help clients get the most out of year-round tax planning. These solutions were developed to identify opportunities and alternative planning options, and to help predict future tax savings for both businesses and individuals.

State Tax Planning

Tax laws vary greatly from state to state. Therefore, engaging a competent professional familiar with local taxes may reap many benefits for your business.

There are quite a few exceptions to the 50 percent deductible rule that a business should take advantage of.

Are you overpaying your taxes? Oftentimes, state tax audits reveal that companies are overpaying sales and use taxes. This represents an unnecessary cost that can be easily avoided. Regular communication with a skilled sales and use tax advisor will increase your knowledge, eliminate overpayments, help you become more competitive in the market and generate extra cash for more useful purposes.

Where is your company conducting business? Some states offer better tax benefits than others. Each state has a threshold or level of activity that must be reached before a company is subject to its taxes. For the best overall multi-state tax situation, companies may want to avoid establishing nexus (the level at which the business would owe taxes) in some states while concurrently striving to achieve nexus in others.

It is important to identify where you are conducting business as a result of current activities. This will help you understand your multi-state requirements and design planning opportunities to lower your overall state tax obligations. Failure to file in a state where you have a “presence” can result in substantial penalties and interest on the taxes you may owe in such state.

Federal Tax Planning

Federal tax laws may require complicated paperwork and documentation requirements. A tax professional helps clients determine the best ways to use the federal tax system to get the most out of their business.

Are you missing out by putting too much into your meals and entertainment expense account? Typically, 50 percent of expenses that qualify as meals and entertainment are deductible. However, many companies throw a host of other items into this account and some of those things are 100 percent deductible. Airfare for a business trip, for example, is 100 percent deductible. Another example is the donuts or bagels that you bring to a morning staff meeting.

Meals and entertainment is an area that is overlooked when tax planning. Generally, a business accounts for these expenses in one or two accounts and never analyzes them. Yet, there are quite a few exceptions to the 50 percent deductible rule that a business should take advantage of. It is one of those expenses that seems to become treated as a “same as last year” item. Reviewing the details of certain meals and entertainment expenses can result in large deductions that a taxpayer is entitled to under the tax law.

Companies often miss opportunities to increase depreciation expense. A Fixed Asset Study analyzes the various capital assets of a business, including equipment, machinery, buildings and land. A Fixed Asset Study is an extensive review of the capital assets built or purchased after January 1, 1987, taking into account recent favorable court cases and IRS guidance that may provide for reclassifying some of the company’s fixed assets into shorter tax lives, thus increasing depreciation deductions. A trained professional can help you determine the best depreciation method given your industry and/or company-specific circumstances. Any “catch-up” amount of depreciation can generally be deducted in the current year.

Are you using research and development (R&D) credits to their full advantage? R&D tax credits can be a source of significant cash for your company. Typically, clients take a tax deduction for R&D costs. However, a review of R&D costs could turn a tax deduction into a tax credit.

A tax credit offsets tax liability dollar for dollar. A tax deduction reduces taxable income. Therefore, the value of the deduction is the amount of the deduction times the tax rate. For example, at a 25 percent tax rate, a company with $4 million of taxable income pays $1 million in taxes. If this company had $500,000 of R&D costs and chose to deduct them, the value of the deduction would be $125,000 (25% * $500,000).

However, the company could choose to take these costs as a tax credit instead of a tax deduction. As a result, the company has $4.5 million of taxable income, but pays only $625,000 in taxes (($4,500,000 * 25%) - $500,000) as the tax credit reduces the tax liability dollar for dollar. The company saves $375,000 ($1,000,000 - $625,000) by taking its R&D costs as a credit instead of a deduction.

Taxes should be an area that businesses look at throughout the year, not just after the year is over. Making the best tax decisions are among the most significant strategic steps you can take for company stability and growth.

The information contained herein is general in nature and is not intended and should not be construed as legal, accounting or tax advice or opinion provided by Clifton Gunderson LLP to the reader. The reader also is cautioned that this material may be inapplicable to or suitable for the reader’s specific circumstances or needs and may require consideration of non-tax and other tax factors if any action is contemplated. The reader should contact his or her tax professional prior to taking any action based upon this information. Clifton Gunderson LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.

Mike Scholz contributed to this article.

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