In today’s world of entrepreneurship, small and medium sized enterprises (SMEs) are presented with several opportunities to increase the profitability of their operations by finding ways to lower their tax obligations. One example of how an SME can do this is through corporate tax planning, which offers a variety of different approaches to minimizing taxes as well as compliance costs associated with structuring a business’s finances. However, in order for an SME to maximize its financial performance through effective tax planning, it is critical that the SME understands what its tax obligations are going to be and how to best utilize tax deductions and credits as well as optimizing their business structure based on tax implications of the structure.
Recent years have seen an increase in tax planning strategies for small business owners. As a result of these changes, the corporate tax planning strategies available to SMEs have become even more sophisticated and effective. The following are four key tax planning activities which every SME should engage in.
- Understand your tax obligations.
Understanding what taxes an SME has to pay, when to file those taxes, and what additional information is needed to comply with the law can prevent the SME from being subject to additional penalties. This includes identifying industry specific regulations. - Utilize tax deductions and credits.
A business should identify what expenses and items are eligible for tax deduction and/or credits. Some common examples of operational expenses of SMEs are:
a. Operational expenses.
Wages for employees.
b. Research and development (R&D) expenses.
R&D expenses may include things like salary paid to the R&D team, general expenses incurred in connection with the development of a new product, etc.
c. Capital investments (e.g. equipment, machinery, computers, vehicles).
These capital investments should be classified at purchase time as long term assets and thus, the cost of the property should be capitalized and not expensed. Alternatively, for an investment in fixed assets, the cost of the fixed asset can be deducted to the extent it is depreciated.
- Structure your business for tax efficiency.
An SME should choose its form of incorporation, partnership, or LLC based on the tax implications of that incorporation. An LLC will generally pay less in taxes than a corporation unless the LLC is doing business as an S corporation. Furthermore, many LLCs that have been set up as pass-through entities for tax purposes have similar operational structures to those of an S corporation in that there are many cases where they provide similar financial advantages to its member partners and business partners. - Implement Tax-Efficient practices with respect to your financial planning.
An SME should avoid incurring a high level of taxable income when they plan to use the funds to fund future growth and, therefore, should structure their operations and investments based on these potential future sources of taxable income. An example of how an SME can best utilize their available resources to fund their growth can be found in the area of investments in other businesses. - Hire a corporate tax consultant.
A corporate tax consultant can assist an SME in complying with its tax obligations, as well as help develop effective strategies to reduce corporate tax burdens as well as provide additional assistance to help SMEs develop long term strategies for utilizing their available resources in order to meet their operating costs.
The advantages of engaging in corporate tax planning with respect to taxes are five-fold:
- An overall reduction in tax liability.
- Increased Profitability.
- Improved Cash Flow.
- Provide Expert Support for Major Business Decisions.
- Minimized Risk of Audits and Penalties.
Overall, the importance of tax planning as part of an effective corporate tax strategy can greatly assist in maximizing the profitability of SMEs today.