Tax planning It is the set of practices and strategies that aim to reduce or postpone the tax burden within current legislation.
"In this world, there are only two things that are certain: death and paying taxes." this phrase attributed to Benjamin Franklyn is very revealing as it reveals a situation that affects and will continue to affect people's lives. The complex tax system in the United States, with multiple levels and categories, makes transferring your money to the government out of your sight or thoughts difficult. This problem is much more accentuated now as the date the tax return must be filed approaches. If you have planned your taxes with your accountant, you are one of those who is calmer this season.
What is tax planning?
It is the set of practices and strategies that aim to reduce or postpone the tax burden within current legislation. For this, a detailed analysis of the structure and activities of the business must be carried out, which will lead to the success of this planning since each company has its peculiar characteristics that must be taken into account for better use of the strategy. Correct tax planning and orderly accounting are fundamental parts of general money management. Here, we present seven key elements of good planning:
1.- Complex Tax Laws:
Tax laws' intricate and ever-changing nature can be overwhelming for individuals and businesses, making it challenging to navigate the complexities. Seeking assistance from tax professionals who stay updated on current tax regulations can help clients understand and comply with the latest laws. Professional advice must go hand in hand with correct financial and accounting information about your company, which is why it is recommended that your accountant be the one who provides you with tax advisory services.
2.- Limited Awareness of Tax Incentives:
Prospective clients may not be fully aware of all available tax incentives, credits, and deductions applicable to their situation. Collaborating with tax experts who can conduct a thorough analysis of the client's financial circumstances and identify potential opportunities for tax savings.
401(k) and 403(b) plans and personal retirement accounts (IRAs) allow you to set aside a large portion of your income for the future without having to pay taxes initially or as it increases in value. A health savings account (HSA) is another valuable tool for tax planning. An education credit helps with the cost of higher education by reducing the tax owed on your tax return. You may get a refund if the credit reduces your tax to less than zero.
3.- Poor Record-Keeping Practices.
Inefficient or inconsistent record-keeping can lead to errors, missed deductions, and difficulty producing accurate financial reports. Adopting organized record-keeping practices, leveraging accounting software (like Quickbooks) and technology, and conducting regular reconciliations can improve accuracy and reduce the risk of financial discrepancies. Small businesses may resist or face difficulties in adopting technology for accounting and finance, leading to inefficiencies and potential errors.
4.- Cash Flow Management.
Small businesses often need help managing cash flow effectively, leading to difficulties meeting financial obligations and planning for future expenses. Implementing cash flow forecasting, negotiating favorable payment terms with suppliers, and actively managing accounts receivable can help enhance cash flow management.
5.- Lack of Financial Expertise.
Small business owners and staff may need more expertise in financial matters, including interpreting financial statements and understanding critical financial metrics. Investing in financial education and training for relevant staff, hiring external financial consultants, or utilizing advisory services can bridge the knowledge gap.
6.- Inefficient Invoicing and Collections.
Consistent or efficient invoicing practices can result in timely payments, impacting cash flow. Implementing automated invoicing systems, setting clear payment terms, and actively following up on overdue payments can improve invoicing and collections processes.
7.- Unoptimized Business Structures:
Businesses might face difficulties choosing the proper legal structure or fail to maximize tax advantages based on their entity type. In companies that carry out different operations, such as providing services and selling products, it may be necessary to separate the businesses and create two companies instead of just one. Seeking advice from tax advisors to evaluate and optimize the business structure can enhance tax efficiency.
Addressing these challenges often requires collaboration between clients and experienced tax professionals who can provide tailored advice based on individual circumstances and goals. Open communication, organized (and practical) accounting, and ongoing education can also contribute to a more successful tax planning process.
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