Monday, July 19, 2010

Tax Planning to Minimize Taxes

Compliance is not very interesting or fun according to most entrepreneurs or business owners.  That's why they usually put off discussing taxes until the very last moment possible.  Not only does this usually cost them more in taxes, but the entire process can be one of the most compelling things they do, if they do it right.

In a recent article I wrote for the American Express OPEN Forum, I share 4 Tips to Get the Most From Your Tax Planning.  In addition to using the right professionals, defining objectives, forecasting, and the right timing/frequency, I want to address one more element that underlines why so many fail to properly plan to save taxes - complexity.

Most businesses are complex organisms with many dynamic and ever-changing components to them.  It is hard enough to build a business in this difficult and extremely competitive and often litigious economy.  Most business owners and entrepreneurs are juggling many priorities, initiatives, and tasks to try to maintain or maybe even grow their businesses.  Adding another complexity, planning for tax, is often neglected with one of the following statements:

"Why should I plan for tax?  I will just pay what I owe, and planning cannot change how much income I make."

"I cannot understand why I have to pay more in taxes every year than I have brought home from my business.  But I just pay it because my CPA tells me too."

"Every year is a big question mark on what amount I will put on the check to the IRS.  I don't understand it, but I pay it and hope the IRS does not audit me."

Just typing those often-uttered sentences makes me cringe.  If you don't understand taxes, then it's time to start.  I'm not suggesting you become an expert, but the principles are not complex in theory, just in practice.  Understand the theory and take ownership of your tax situation.  It needs to be a priority to you because it is one of the major cash outflows of every business (and business owner).

Sorry, that was a little bit of a rant, but claiming ignorance is not a valid excuse, in my opinion.  Rely on your tax CPA and/or advisors to help you understand.  If you cannot understand them, then fire them and hire some who you can understand.  The point of all of this is that shying away from taxes and tax planning because they are complex is not acceptable.

Some tax planning strategies require adding some complexity to a business, and this is OK as long as the tax savings are far in excess of any extra costs to handle the additional complexity.  Embrace the complexity of taxes and tax planning and you will see your cash flow improve!