Question: How can you put business tax planning into perspective?
For almost all business owners, their business is the main source of their financial well-being and personal wealth.
It is the golden goose that must be fed and cared for. It is this overriding economic concern that must not be compromised by conflicting strategies and tactics. In that cash flow is the lifeblood of any business, we must foresee and work within the business’s need for cash now and in the future and integrate those needs into overall strategy development.
Tax planning should be integrated into the business’s need for cash, primarily, and its need to reduce taxes, secondarily. The following suggests a prioritization of the uses of the business’s cash to meet the economic objectives of the business and its owner while minimizing taxes along the way.
Within the business:
Pay yourself adequate compensation to fund a reasonable lifestyle.
Fund current expenses , consider strategic expenditures that will drive growth.
Fund asset acquisitions.
Fund insurance, accounting, legal and personnel expenditures that will safeguard business assets and protect the business’s value.
Fund employee benefits to provide current and long-term personal and employee financial needs (401(k), profit sharing, medical, disability, life insurance, etc.), lower your tax liability and build employee good will.
Pay your taxes (personal and business).
Fund for future reserve requirements.
Distribute cash you don’t anticipate will be required by the business.
Most business expenditures incurred provide for the economic growth of the business and are either immediately deductible or depreciable. Nondeductible expenses still have economic value. Expenses such as meals and entertainment typically provide a corporate and/or personal economic benefit, are paid for by the company and build good will.
Employee benefits offer the opportunity to invest, acquire insurance, and make certain personal expenditures on a pretax basis for the benefit of the owner and the employees. Deductible and nondeductible plans should be carefully evaluated for the benefits they can provide in building the value of the company and the wealth of the owner.
Outside the business:
If your company is renting its facilities, consider acquiring a building and renting it to your business. A building allows for the use of debt to increase the value of your investment; it can be depreciated producing deductions to offset business and nonbusiness income. Investment gains can be deferred indefinitely. And, amounts spent for tenant improvements improve your property and not someone else’s.
The prioritized use of a business’s most precious resource, cash, is critical to the building of business value and the personal wealth of the business owner. To provide clarity and commitment, a plan for the use of that cash should be thought through, then committed to in writing and shared with those who can help keep the plan on track.
Written by Bob Gellman of CBIZ Accounting, Tax & Advisory of San Diego, LLC.