Tax Planning is Essential to Ensure Tax Compliance
November 11, 2024 by Gordon Advisors
by Mark Tuscany, Senior Tax Manager, Gordon Advisors, P.C.
When filing taxes for a small business, the mechanics of tax planning and tax compliance are critical to mitigate risk and reduce tax liability. The Internal Revenue Service (IRS) defines a small business in different ways and by using different criteria, depending on context.
Tax planning and tax compliance can be viewed as a continuum in tax preparation. Conducting tax planning throughout the year with a strict eye to detail sets up the business for successful compliance with federal, state and local tax laws.
Tax planning is a year-round pursuit during which the business keeps track of expenditures and purchases that may affect the taxes paid. Detailed record keeping and receipt retention are essential, such as for building and equipment rent, salaries and wages, employee benefits, office supply purchases, building and equipment maintenance and repairs, renovation and building/plant expansion costs, marketing and advertising costs, vehicle costs, travel expenses, etc. To confirm the financial information needed to be tracked, check the IRS website for a list of tax-deductible expenses and the rules governing each.
The next step in tax preparation is tax compliance, which benefits from meticulous tax planning. Tax compliance is exactly what it seems — complying with tax laws governing business finances, including federal, state, municipal and international, as applicable. With the varying requirements for, and caveats to, tax laws, conscientious tax planning creates a solid foundation for tax compliance.
An essential factor for tax planning is knowing the difference between tax deductions and tax credits. Both save the business money by lowering taxable income. Yet, each has different requirements for claiming its tax-saving benefits.
Reducing Taxable Income Through Deductions
Tax deductions are subtracted from the business’ earnings, or the company’s yearly profits, and lower the amount of taxable income to yield a business’ earnings before taxes, or EBT.
Following is a list of typical business tax deductions:
- Salaries and wages
- Employment tax: Social Security and Medicare taxes; unemployment taxes
- Business and equipment rent
- Repairs and maintenance
- Employee benefits
- Vehicle expense
- Professional services
- Sales tax: is imposed on goods and services by many U.S. states, as well as counties and cities; taxable items will vary by locale
- Other state and local taxes:
- Income taxes: depend on the articles of incorporation and state laws
- Property taxes: businesses that own buildings, land or other real property may be taxed at the state and local levels
- Franchise taxes: approximately 12 states impose this tax on businesses of various types, in addition to franchises
- Business license fees: for businesses required by federal, state or local governments to obtain a license and pay the appropriate fee; it functions like a tax
- Other business expenses: costs of running a business are mostly deductible and can include utilities, travel expenses, office supplies, equipment, advertising/promotion, internet and wireless services, etc.
- Depreciation: instead of deducting the cost of certain property purchased in a given year; in some cases, businesses will be required to depreciate the cost over time, resulting in long-term tax deductions
Tax Credits Reduce Tax Liabilities
While tax deductions reduce businesses’ taxable income, tax credits reduce taxes on a dollar-for-dollar basis. The following are typical tax credits:
- The Work Opportunity Tax Credit (WOTC) is available to businesses that hire and employ members of identified “target groups”
- Energy Efficiency and Renewable Energy Credits
- Disability Access Credit
- The Research and Development Credit
- Credit for Employer Provided Medical Leave
- Employer Provided Childcare Credit
Check the IRS website for a complete list of business tax credits and the forms to claim them.
Preparation Compels Compliance
To say that tax law is very complex would be a gross understatement. The laws and reporting requirements for legal compliance change every year, placing greater emphasis on tax preparation. Accurate and detailed record-keeping throughout the year will help prepare businesses to lower their tax liability and mitigate the legal risks of non-compliance with tax law.
For answers to your questions about tax preparation and tax compliance, contact a trusted tax professional at Gordon Advisors: 248-952-0200; info@gordoncpa.com.