Why is Tax Planning and Advanced Tax Reduction So Important to Your business?

Business start-ups have a failure rate that ranges from 70% to 95%. This is staggering.  And this is no reason to not try to start a business, but most businesses either play it safe and not capture markets, or they realize the large burden that tax plays in their success. 

Here are the risk factors:

1) Tax burden is a surprise 

A business usually doesn’t realize how large a tax burden can be in the first year.  In fact, many businesses' experience tax benefits during a start-up scenario. But as the owner’s see the tax liability go from beneficial to increasing payments it is hopefully realized that mistakes commonly creep up on the DIY or even a paid traditional tax preparer/CPA.  The tax burden is the second largest single expense that a business owner faces.  Businesses are coupled with their own tax burdens for personal income tax, capital gains, employment taxes, tangible taxes, inventory, excise, property, sales and use, licenses, and don’t forget hidden state taxes.  These taxes will come whether you ignore them willfully, attempt to DIY, or plan for the reduction of the tax to fit the business need.  There are plenty of reasons to hire a professional.

2) Experience

In some professions, the lack of experience can destroy a company’s reputation before it really begins.  Understanding when to say “no” to a deal, or just telling someone that you are not the best person to do the job is better than doing a mediocre or poor performance.  However, this is only the work activity that produces sales, most people that start a business get this part right.  The activity in the business is NO MORE than half the battle.  The management half leaves many business owner’s wearing figurative hats or titles that each must either delegate duties or learn how to perform those tasks/projects with increasing efficiency as the business grows. The business owner may find several areas too time consuming. They may even hurt their business by not performing them at all.  These are where most businesses find failure. This failure is not always experienced in the first few years of operation, sometimes this failure is realized in their intermediate business longevity.  The successes of making money give way to more of the rooted problems of running the business which ultimately can lead to large tax liens, bad relationships, and lawsuits. 

3) Insufficient Capital

Many businesses take a year or more to begin funding daily operations through cash flow generated by sales or services provided.  Sufficient capital must be in place to fund operations during those times.  Purchases such as inventory, estimated tax payments, property plant equipment, insurance, employee training, and advertising costs can be a huge outlay of expense that the business can not fully pay for with receipts from sales.  This area takes intense planning and leads to advanced tax reduction strategies.

4) Poor Location

Locations can be one of the most important factors for business success or failure.  If you are selling inventory on Amazon, eBay, Etsy, Shopify, Oberlo, and many other ecommerce sites.  These can help, but if you don’t separate your business from your personal, then there are tax ramifications.  And not every business is an “Amazonian”, the businesses with brick and mortar in the right location will always beat an online start-up.  The online start-ups are finding that they have literally TONS of competition, and that lowers profits.  Only the most agile businesses thrive online.  Nonetheless, if you have ever watched Shark Tank, the capital discussions start early in a business whether small or large.  The location of that business is a huge topic in the growth or downsizing of a company.

5) Poor Inventory Management

Keeping too much inventory uses too much capital completely unnecessarily.  While having too little inventory can lead to shortages and customer dissatisfaction.  Many businesses have varying degrees of control over this area.  Inventory assets are a growing concern for many start-ups that intend to start up while working out of their home.  

6) Over-investment in fixed assets 

Investing too much too quickly in long-lived assets also uses much needed capital in an unnecessary way.  It also complicates the tax strategies that can be applied.  For assets to be beneficial there needs to be revenue that is generated to achieve solvency for the company.

7) Poor Credit Arrangements

Lacking access to sufficient, reasonably priced credit can create cash flow problems if sales decline or customers do not pay their business in a timely manner.  This will hurt the business growth and relationships, but furthermore the tax implications of not paying liabilities limits the taxable assets. Your company's taxable assets can be covered further in a tax discovery session.

8) Personal use of business funds

Business funds should not be used for personal purposes.  Such use can leave a business without sufficient cash or available credit to fund operations.  All too many businesses believe that they have “gotten by” with using the business as a personal savings account, and do not believe they will “get caught”.  This is a big problem for your tax health and longevity of the business.  It is estimated by the IRS that 40% to 50% of businesses improperly transfer cash or assets from business to personal use, and even more intermingle the accounts.  This is an ugly 10 for IRS audits and scrutiny. 

9) Low Sales

Poor knowledge of the market can result in lower-than-expected sales.  Having an entrepreneurial mindset to research first, test the strategies, and adjust to the customer demands is important when opening a business.  This is where Advanced Tax Reduction pays off the most.  With substantiated reasons that sales have softened this can create an intentional pivot in the character of your company and increase tax savings. 

10) Competition

Not properly assessing competition can potentially leave a business in a position of needing to compete in a market where it cannot do so and survive.  Learn how to differentiate yourself with known strategies.

11) Unexpected Growth

Growth without sufficient planning is a tax disaster and can leave your inventory, operations, and net promoter scores from customers relationships imploding.  Anticipating growth can open many unexpected loopholes in your tax health. Historically documenting your year on a tax return is a reactive approach that ultimately leaves businesses increasing their tax liability.  Planned growth is the key to understanding your business and personal goals.  These goals will be aligned with your tax plan at Arrow Exchange. 

What is tax planning or Advanced Tax Reduction? 

Each individual has a marginal tax rate, an effective tax rate, and a synergistic tax rate.  The understanding of your marginal tax rate and how your actions can increase those rates or lower them is Tax Planning or Advanced Tax Reduction.  The regulations that complicate our tax code is part of being an American or profiting from American society. Those taxes, which are various, all too often are overlooked as an inevitable cost of society or just the cost of doing business.  But these taxes can be reduced.  They are not static or unchangeable.  The tax incentives or “loopholes” that are available are not just available because people know about them (so many have no idea what is there), they come from strategies that work together in combined actions that benefit your life or lifestyle.  The government would not put the tax code into law if they did not intend on taxpayers to take advantage of the provisions.  They want the economy to move in a direction of growth, and that means that those options need to be on the table for the best benefit of our business owner’s.  

At Arrow Exchange we want to open the book of tax reduction and make it understandable that you can reduce your tax.  If you have $50,000 that is taxed at 22% or 24% or even >32%. Would you like to know you can manage that rate and synergize your tax bill?  Just $50,000 that is taxed at 32% all too often can be reduced to 24% or lower.  If this can be done it will save more than $5,000 a year.  What can you do with that money year after year? Defining a plan to reduce your tax is Tax Planning. 

If you would like to discuss your business, please call me at 423-400-8680.