GREAT IDEAS FOR ENTREPRENEURS FROM THE THOUGHT LEADERS AT CASEY NEILON
WHY ENTREPRENEURS NEED TAX PLANNING, NOT JUST TAX PREP
FIVE QUESTIONS TO THINK ABOUT YEAR-ROUND TO HELP MITIGATE TAXES
By Leslie Kidd
When I say the word “taxes” what image pops up in your mind? Is it a completed personal or business tax return awaiting your signature? Maybe it’s a bank statement that looks pretty good until you have to write a check to pay a tax bill? Maybe it’s the annual tax planning package that your CPA sends you. Whatever it is today, I wish I could get entrepreneurs to have a different picture in mind. Here is what my ideal picture would look like.
A conversation. That’s right. A conversation. In my ideal world, “taxes” would be an ongoing dialogue between an entrepreneur and a CPA that they deeply trust. In this approach, there would be a year-round relationship where a CPA is never playing catch up on an entrepreneur’s situation, goals and dreams. Instead, the CPA is an active partner in helping mitigate taxes to make those dreams come true. If you’d like to foster this type of relationship, here are five questions to put at the center of the conversation with your CPA.
Tax Planning Versus Tax Preparation – What’s The Difference?
I believe the key to tax mitigation is tax planning, not so much tax preparation. Thousands of competent and technically qualified people can prepare your taxes. But only someone you deeply trust, who knows your situation intimately, can help you build and execute a plan to effectively mitigate taxes. What’s the difference between tax planning and tax preparation?
Tax planning is an ongoing conversation between you and your CPA. Tax planning is about anticipating what is coming and taking steps to ensure that you take advantage of every possible strategy available to you. Tax planning is a lot like chess. It’s about anticipating moves that you could make if things go a certain way.
Tax preparation is an event that usually culminates in the filing of documents with government or regulatory agencies. Tax preparation is a lot like checkers. There are certain moves you have to make right now and they are often rather limited.
Here is why tax planning is more important than tax preparation, if your goal is to mitigate taxes. The more advanced notice you give your CPA about moves you intend to make, the more they can do to help you. The more you communicate with your CPA to help them understand your unique situation, the better their counsel will be tailored to your specific needs.
Some people seem to think that taxes are static and predetermined, like a crossword puzzle where all a CPA has to do is fill in the blanks. I don’t think this way at all. Tax prep can be limited but tax planning is not. I believe tax planning can be very creative, flexible and even innovative. If you got dinged on your taxes last year and you believe it will likely happen again this year and you’re just resigned to that, let me give you a different perspective.
There are probably more options available to you to mitigate taxes than you’ve ever considered. But this might require a different relationship than you’ve ever considered with your CPA. Over the last 5 years, more times than I would have liked, I’ve had to say to an entrepreneur – “I wish you would have told me about this six months or a year ago because I could have helped you a lot. We had a lot of options back then. But I’m afraid our options are now very limited.”
If all that you want out of a CPA is someone to prepare clean, accurate and timely tax returns, then tax preparation is likely all you need. But if you want to keep a greater share of the wealth you create through your business and to protect that wealth from unnecessary taxes, then tax planning is something you need now.
Five Questions To Foster This Relationship
If you’d like to foster this kind of relationship with your CPA, here are five questions that can really help:
- How clean and accurate are your books?
- Are you planning any major transactions?
- Do your estimated tax payments no longer make sense?
- Do you truly understand how changes to the new tax laws effect you and your business on a day-to-day basis?
- Do you have tax blind spots?
While there are certainly many other important questions that can and should be discussed, these five questions are a good starting point.
Tax planning is an ongoing conversation between you and your CPA to anticipate moves you could make if things go a certain way.
How Clean And Accurate Are Your Books?
For entrepreneurs, your business’s financial performance is probably the single largest indicator of what your tax burden will look like. Therefore, it only makes sense that your books need to be accurate, up-to-date and ready to be analyzed by a CPA. Unfortunately, this is often not the case.
An important part of tax planning is anticipating tax burdens many months in advance of having to file a tax return. This gives you the greatest opportunity to maneuver toward tax-advantage solutions. But if your books are not accurate and up-to-date, it’s unlikely that your projections will be accurate. This means that the maneuvers might not work out either.
As software applications like QuickBooks have become commonplace and cloud-based, I find that entrepreneurs tend to underestimate how much work is involved in keeping their books up to date. Even if you synch your bank accounts, credit card accounts and other types of data sources to QuickBooks to reduce manual data entry, all of those transactions still have to be reconciled. This can be quite time consuming.
At Casey Neilon we have been working with a number of options to help entrepreneurs keep their books up to date and error-free. This is important to us because we cannot deliver against our core value proposition – being a trusted advisor – unless the books are correct. Hopefully in the near future we can help even more clients with this important area.
Are You Planning Any Major Transactions?
Major transactions nearly always come with some form of tax consequence or option to mitigate taxes. But the key is planning the transaction so you get the greatest tax benefit possible. I find that entrepreneurs tend to tell their CPA, after the fact, about transactions they’ve made. So if you are thinking about any of the following transactions, I recommend that you bring your CPA into the conversation many months in advance:
- Will you sell a building that your business occupies today while you remain in it as a tenant?
- Will you buy investment real estate?
- Will you make a large investment in capital equipment?
- Will you take on a large new client who will infuse your business with substantially more revenue and profits?
- Have you sold any major business assets that were purchased in recent years?
- Have you created a Trust and have you placed substantial business assets within that Trust?
Do Your Estimated Tax Payments No Longer Make Sense?
Estimated tax payments are an important strategy for avoiding problems with tax agencies. But sometimes, estimated tax payments no longer make sense for an entrepreneur because of changes in their situation. So I recommend that you ask yourself these questions:
- Are you struggling to make your estimated tax payments because they are based on a better financial situation than what you face today?
- Are you paying too little in your estimated tax payments because your financial situation is actually better today than when your tax payments were estimated?
- Do you wish you had asked more questions about your prior year tax returns and how estimated tax payments were calculated?
- Has something major changed between this year and last year that you need to communicate with your CPA about that might change estimated tax payments?
In theory, estimated tax payments should produce a situation where you come to a tax filing deadline and have no, or a very small, tax bill. Some large corporations have little wiggle-room when it comes to estimated tax payments. But many smaller companies can make changes to tax estimates and this can free up cash for all sorts of purposes. But this decision should be made in close consultation with your CPA and with an eye toward unintended consequences.
Do You Truly Understand How The New Tax Laws Impact You And Your Business?
The Tax Cuts And Jobs Act (TCJA) has created a lot of interesting opportunities for entrepreneurs and a lot of confusion. If you feel like you don’t understand the TCJA and that you haven’t taken full advantage of options available to you, you’re not alone.
A number of deductions that used to be available are now limited or changed. For example, for business, meals and entertainment used to be grouped into a single category that was deductible at 50%. Put simply, now entertainment is not deductible, but meals still are. So you should be tracking these expenses separately, especially in your bookkeeping software.
For personal taxes, the changes are substantial. For example:
- The itemized deduction threshold changed, changing, limiting, or eliminating the deductibility of mortgage interest, property and sales tax and various other itemized deductions including unreimbursed employee business expenses, tax preparation fees and continuing education expenses.
- Net operating losses for closely held businesses flowing to your personal return will be limited based on gross income thresholds.
- Education credits have changed significantly.
- Alternative fuel vehicle credits have changed significantly.
If you are not sure how the TCJA changes will impact your situation, this is definitely something to talk to your CPA about during a tax planning session. During tax season our CPAs attempt to make the time to explain the intricacies of tax laws and how these apply, or do not apply, to your situation but discussing questions and concerns proactively is always more beneficial.
Do You Have Tax Blind Spots?
Entrepreneurs routinely seem to operate in spite of blind spots of one type of another. This comes with the territory and confident business owners make decisions based on incomplete information all the time. But taxes should not be one of those areas.
I often find that entrepreneurs have far more questions than they actually ask. Things come up over the course of the year where they would like the input of their CPA, but they think it will cost too much to get advice. They also view their tax returns and don’t understand certain things and want to discuss those questions in-depth at a time when CPAs have the least amount of time. So here are some suggestions to help you have the most effective tax planning session with your CPA.
- Are there things that you really don’t understand? If so, make a list of them and send them in an email to your CPA before your tax planning session. This will give them time to research the more complex areas where you might need a better strategy.
- Do you believe you are paying more than your fair share in taxes? If so, why do you say this? How have you arrived at this conclusion? Be sure to document this and bring it up to your CPA so you can get their perspective.
- Do you understand how your tax bill is calculated? Many entrepreneurs don’t understand this. If that is your feeling, don’t be afraid to ask your CPA to explain it to you and then make recommendations about how to reduce your tax burden.
- If you have a flow-through business entity, do you truly understand how it effects your personal tax situation? If not, this is something you’ll want to discuss with your CPA.
- What are the top 5 things you want to talk to your CPA about after viewing your tax returns? Make a list of those and send them to your CPA before you tax planning session to ensure all of your questions get addressed.
The five questions I’ve outlined here will help you have very productive conversations with your CPA in a tax planning session. If I can help you address any of the situations I’ve brought up in this article, please don’t hesitate to reach out to me or connect with me on LinkedIn.
Leslie Kidd – CPA, Manager
I am a CPA and Manager at Casey Neilon. In this role I meet with clients, prepare and review tax returns, respond to tax and accounting inquiries from clients, assist with bookkeeping and financial statement preparation, assist on estate and trust projects, work on financial statement audits, as well as overseeing, advising and training other staff accountants with various projects.