Individuals and businesses are faced every year with tax preparation. This is compliance work required by a government entity to record and report the history of what occurred financially for the individual or the business over the course of the year. Tax preparation looks backward at what happened. Tax planning, on the other hand, looks forward to the next year and beyond to see if shifts can be made in order to take advantage of tax breaks. Doing so will lower what is sent to the government, freeing up precious cashflow to reinvest in the business or take your family on a well-deserved vacation.
Tax planning looks at the many combinations of tax breaks, loopholes and strategies to reduce individual and business taxes. For businesses, entity formation can make a difference. Shifting income is another strategy. Retirement plans shift income from the current year to a future year when an individual’s tax rate will most likely be lower than the current rate.
Expense shifting is another tax reduction strategy. Most people are aware that mortgage interest can be a deductible expense for an individual’s taxable income. Shifting from paying rent to paying on a mortgage is a prime example of this strategy. Businesses can use a similar strategy by purchasing a capital assets such as equipment, vehicles, or buildings which can be amortized over their useful life, thereby reducing taxable income.
Loopholes have a bad reputation and many people think using loopholes is practicing tax avoidance using shifty ethics. However, there are perfectly legal loopholes, created by the government as an incentive to promote public policy. For example, tax breaks leave more money for a business to reinvest and grow, thus stimulating the economy. When a retail store wants to move merchandise more quickly, it has a sale to incentivize customers to buy stuff. Governments use tax policy in the same way. A business that doesn’t take a tax break is like a person who wants to pay full retail price on Black Friday – it’s just not good sense.
2021 is almost in the books and it may be too late to use tax planning to lower your taxes this year. However, why don’t you go into the new year with a resolution to talk to an accountant about strategies to lower your future taxes? Just make sure this is a resolution you will keep! Momentum tax planning packages are an affordable (and deductible) way to plan ahead and save!