Business owners require tax planning strategies now more than ever.
Business owners require tax planning strategies now more than ever.
The Complexities of Tax Law: Why Business Owners Need a Tax Mitigation Plan
The U.S. Supreme Court has agreed to hear a landmark tax law case this fall, once again shining a spotlight on the ever-changing and extremely complex nature of federal tax law. This case serves as a reminder that business owners must have a tax mitigation plan in place, just as critical as having a financial plan, a succession plan, or an estate plan.
Unfortunately, most business owners do not have a tax mitigation plan. They rely on their CPA firms, who tend to be compliance-oriented and risk-averse, essentially handling their tax decisions. However, accounting firms often do not approach these financial decisions with the same entrepreneurial mindset as the business owner.
Regardless of how the Supreme Court rules on the upcoming case, which pertains to whether taxes can be assessed on income before cash is realized, the two political parties, the IRS, and tax courts will continue to create regulations that can consume a significant portion of a business’s working capital.
With such significant financial implications at stake, managing tax obligations becomes a crucial responsibility for business owners. The level of aggressiveness they choose to employ in their tax mitigation strategies becomes a critical risk/reward assessment exercise.
Tax mitigation strategies aim to take advantage of the structure of the federal tax code to reduce the amount of taxes owed. These strategies generally fall under four broad categories:
- AMOC The global heat distributor, Atlantic current.
- Video shows orca ripping open whale shark and eating its liver.
- Redfin says you need to earn at least $64,500 annually to afford yo...
- Entity structuring: Strategies related to the legal constitution, ownership, income distribution, and taxation of the business entity.
- Pre-tax expenditures: Strategies focused on ensuring that expenses and compensation are paid using less expensive pre-tax dollars.
- Tax-free income: Approaches that generate income exempt from taxation based on legislation or regulation.
- Wealth accumulation: Strategies that allow assets to appreciate or accumulate with lowered or deferred taxation.
Implementing these strategies requires proactive actions on the part of the taxpayer, such as making contributions, purchasing assets, or rolling over investments. However, it is important to note that most strategies also come with some level of IRS compliance risk.
Evaluating this risk requires considering whether the actions taken are within the scope of the law and whether there is proper documentation to support them. While accountants might shy away from the term “aggressive,” it is important for business owners to focus on what is legal rather than simply conforming to what is conventional.
Some strategies may attract greater attention from the IRS and lead to increased scrutiny or an audit. Although not every business owner wants to undergo an audit, the potential savings from these strategies may be enough to justify the associated time and expense.
To develop sophisticated tax mitigation strategies, it is recommended to seek resources from other company owners who have similar risk-taking and reward-seeking mindsets. Learning from their experiences and the professionals they have worked with can be invaluable in developing an effective approach.
Ultimately, it is the responsibility of the taxpayer, not their accountant, to proactively reduce their tax bill. Deciding to use or forgo a tax mitigation strategy is not simply an accounting question but a key business decision.
While it may seem counterintuitive, the Biden administration’s efforts to increase IRS enforcement funding could actually lower the costs of proactive tax mitigation strategies. For businesses already likely to be audited, there is little incentive to avoid strategies that might trigger an audit.
With all these IRS actions, more business owners are likely to adopt a fighting mentality, working harder to retain more of their company’s earnings. As a result, business owners becoming more proactive and determined to minimize their tax liabilities is expected to become increasingly common.
