At Seiler, Singleton, & Associates, PA, I do a lot of year end income tax planning for small businesses. In fact, income tax planning will occupy a majority of my time from now through the end of the year. This service is an important part of the financial health of many of our small business clients.
Year end income tax planning consists of two parts. First, a projection of taxable income for the business and its owners is made. Second, recommendations are made to the business to decrease or increase taxable income. These recommendations are made based on the unique situation of the company and the business owner’s long-term goals. For instance, a business may be looking to make a significant loan to fund the purchase of a major piece of equipment. Planning may include ways to increase business taxable income before year end to help meet bank loan requirements.
However, most of the time small businesses are looking to reduce taxable income. The problem is, business owners will often focus their attention on reducing taxable income at all costs. This is a dangerous position to take. A business owner should never spend money for the sole purpose of saving tax.
To help counter this mindset, I often tell clients to consider the needs of their business and then let me help them plan the timing of that need. For instance, if a business owner decides his or her business needs a new piece of equipment, then I can help them determine when to make that purchase. Looking at their unique situation and current tax laws, I can show them the effect of buying the equipment this year or next year. What I do not want is for the business owner to decide they want to reduce their tax and, because of that decision, buy a piece of equipment that the business does not need.
Spending cash simply to lower taxable income is always a bad idea. This mindset puts the financial security of your business at risk. The tax savings from the spent cash will always be a fraction of the total amount spent. The difference is less money available to spend on future business necessities. Remember, cash spent frivolously is difficult to recover. Always protect the cash in your business. Yes, you may have to pay a little more income tax than you would like. But you will be glad to have the cash available at the next economic downturn.