While most business owners are familiar with tax preparation services, few know what tax planning entails. Listed below are some key features of tax planning and topics to consider when determining whether a tax plan is necessary
Tax Preparation Vs. Tax Planning
Tax preparation is a backwards looking yearly process that is heavily detail oriented but creates few opportunities to reduce one’s tax liability. Tax planning is more complex and has forward-looking objectives to create tax savings in current and future years. For this reason, tax planning can be considered an investment, while tax preparation is a yearly administrative expense.
What Does a Tax Plan Include?
There are hundreds of factors and strategies to consider based on the clients’ goals and circumstances. Each tax plan should evaluate clients’ goals, family, business activity, business entity structure, retirement accounts, and profitability. Another goal is to identify and maximize all the potential deductions. The tax plan considers the timing of deductions as well as depreciation strategies and elections that will create the most savings.
Who Needs a Tax Plan?
Business owners who earn more than $150 thousand would likely benefit from a tax plan. However, business owners operating at a loss may still benefit from a tax plan by using losses strategically to offset other income sources. Real estate investors may find ways to create losses and use them to offset taxes from their salaries. Someone whose only income is from a W-2 job likely would not benefit from a tax plan.
How Much Should You Invest in a Tax Plan?
While a tax plan is more expensive than tax preparation, the return on investment for a tax plan should be significantly greater than its cost. Our tax plans typically create tax savings between 400% to 1,000% of our fees in year 1 and increase over time as the clients’ profitability increases (in part due to tax savings), and strategies are further implemented. Pricing varies based on the scope of work and complexity of the tax situation, but it is one of the most valuable investments a business owner could make.