Tax planning and preparation are two separate activities, but are definitely connected.
Tax planning is the art of thinking out of the box about what your activities are and how they are accepted by IRS. This is mostly about listening to a client talk about their family, there business, their goals, and what they actually do to earn their money. Sometimes a person beleives they are running a business, but in actuallity they do very little; the children may have taken over the business, and the owner is really retired. BING! A possible tax planning opportunity.
After listening, then asking the questions is important. Get to the details on what the business is actually doing, does it manufacture something, when the owner thought it just installed something? These types of details and perspectives are what Tax Planning is all about.
The Tax Planning process then lays out different alternatives and compares them against the true taxes. It should be done for a period of years, projecting what will happen in the coming years. Some decisions may make sense for the first year, only to be a real problem in the second or third year. Depreciation is a good example of this…often a businessman will ask if he should buy a piece of equipment at the end of the year. Might be the right decision and it might give a good tax benefit. But, maybe the next year would need the benefit more, or maybe the method of depreciation should be looked at over a number of years. This is why tax planning and preparation must be done for more than one year.
Once several alternatives are presented, the tax planning has to step back to the business planning. Is the tax saving more than the actual economic cost. To go back to the depreciation question…is the business better off to have that new vehicle than to get by with its current vehicle for another year? Determine the real cost of that tax saving tool, and don’t forget to factor in the cost of capital required to either buy the equipment for cash or the interest on a loan used to buy the equipment.
And it is not just the business that needs to do tax planning. Selling of stocks, taking dividends in cash or stock, maxing out the 401K or planning in a Roth account…all part of the long term tax planning.
Tax Planning is so much more than you probably thought.