Business tax planning vital to success

by Ruth Scott

SBJ Contributing Writer

Tax planning is a continual process throughout the life of any business.

"Business owners need to understand that taxes are a part of any ongoing business," said Don DeHaven, of DeHaven & DeHaven PC. "The first thing is to plan for the regular taxes, to know what taxes need to be paid and when they are due."

The basics of tax planning should begin when a business first starts, said Greg DeGood, of Decker & DeGood PC. At that time, a business owner must make a number of decisions. The first step is to decide what type of entity C corporation, S corporation or limited liability company the business will be.

"Each of these entities can generate different tax advantages and disadvantages," DeGood said. "It just depends on the nature of the business, growth and profit expectations, financing and owner involvement."

Another important step for the new business owner is selecting a method of accounting and the accounting period to be used, said Larry Davis, of Davis, Lynn & Moots PC. "Some types of businesses have certain requirements in these areas. A business owner needs to be familiar with the particular industry or profession."

According to DeGood, compensation tax planning is critical to the future of the company. Various employee benefit plans are available, allowing "employees and owners to save income on a tax-deferred basis."

Selection of a plan depends on the ages and salaries of owners and employees, as well as other factors, he said. These plans are "a tax-deferral method whereby you get a deduction currently, and tax-free growth."

He said that since the funds are typically taxable when they are withdrawn, an employee will most likely receive a greater tax benefit by being in a lower tax bracket when the funds are withdrawn at retirement.

"Also, in a closely held business, owner-employers should consider using all the fringe benefits possible for their employees," Davis said.

According to DeGood, there are many options when purchasing and selling fixed assets, or the business itself. The timing of fixed-asset purchases should be well-planned, he said. "The method of depreciation used is very important. The decision to accelerate or defer depreciation allows the business owner to take the most advantage of tax brackets."

He said that like-kind exchanges enable a business owner to sell a piece of equipment and acquire another without paying taxes on any gain generated in the sale of the equipment.

"Certain requirements must be met," he said. For instance, a qualified intermediary must be hired to do the selling and buying, because "the business owner can never have access to the proceeds."

When buying or selling a business, purchase-price allocation can impact depreciation and deductions, thus affecting the amount of taxes paid, DeGood said. "These allocations must remain within certain guidelines and cannot exceed fair market value," he added.

DeGood said the majority of small businesses perform many of their own accounting responsibilities, but have some sort of review on a periodic basis, to make sure their accounting is accurate.

Also, "It's fairly typical for business owners to enter into transactions without obtaining tax consultation before the transaction occurs," he said.

"As new things come up, seek advice," DeHaven said. "The key is to ask before you do something you're not familiar with. You can't change something after you do it." He said, in some cases, nothing can be done to reduce taxes, but often there are ways to reduce the amount paid.

DeGood said that small business owners sometimes don't realize the different options that are available to achieve certain results. "Some businesses seek a lot of assistance; others none at all. It's usually advantageous to seek professional guidance prior to any business transaction," he added.

"Nobody wants to pay any more taxes than they have to," Davis said. "Any time you're making an acquisition or major decision, you need to take a look at taxes, as well as many other factors, such as the legal implications."

"Understand what you've done before and apply that to future situations," DeHaven said. "Seek advice during the year for those things you aren't familiar with, so you won't be surprised at the end of the year."

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