Though running any type of business brings with it some inherent risks, we all know that a business with a sound plan is more likely to succeed. Unfortunately, it is often the case that while entrepreneurs may have all sorts of business plans in place, little or no importance is placed on having a tax plan.
Many say, “I just have a one-man shop, surely I don’t need a tax plan.” But aside from the fact that a “one-man shop” needs to pay taxes, do you intend to remain a “one-man shop forever?” – I don’t think so. Therefore, the same importance placed on planning a marketing or growth strategy should be placed on tax planning. As Benjamin Franklin said, “If you fail to plan, you are planning to fail.”
What is Tax Planning?
Tax planning involves considering the implications of current and future business decisions with a view to legally minimize or delay tax liabilities. Although our tax legislation was created to ensure that everyone pay their fair share, they also afford all taxpayers the right to organize their financial affairs in such a way to minimize their taxes, whenever possible. This may allow you to have more money to invest in your business or otherwise.
With the assistance of your tax professional, a simple tax plan can help you to understand, among other things.
How different types of income are taxed, how to utilize tax deductions to reduce your taxable income, the industry specific tax credits or relief availability, and the tax implications of doing business overseas or with a related party.
This may seem onerous, but your initial tax plan need not be 100 pages long, very technical or even very detailed. A simple written list of the impact of taxation on certain key decisions can act as a road map and make a huge difference to your business life and performance.
Why is Tax Planning Important?
The biggest mistake many businesses make is to not concern themselves with taxes until February or March – with the hopes that the government will somehow decide to abolish taxes before they are required to file or pay. However, during this period of indecision, you may have committed tax blunders that could possibly cost you millions in otherwise avoidable taxes. The aim is to plan the future of your business with taxes in mind to make sure you don’t have to learn these lessons the hard way.
Furthermore, the space in which we now do business transcends borders. With technology, you can have a business registered in Jamaica, your main supplier in China, your accountant in the United States and a customer base anywhere in the world. You would now, not only have to concern yourself with the local taxing legislation, but of all these countries as well. A tax plan can help you to understand the differences in; tax systems, tax rates, business incentive provisions, and compliance requirements.
The above brings to the fore, some of the reasons why tax planning is important. With at least a general understanding of the potential impact of taxation on your business, management is better equipped to make everyday business decisions. Some of the decisions that a tax plan may assist a business in making are:
Timing of fixed assets purchase. Valuation method for inventory. Applicability of industry specific tax relief. How to structure compensation for employees, contractor, etc. Which corporate structure to employ (sole proprietor, partnership, etc.) How to invest surplus income (shares, capital venture, etc.) How best to negotiate business deals in other countries and with related parties.
Tax Avoidance or Tax Evasion
There are many mistakes’ people make when it comes to tax planning that could cost a business significant amount of money. Outside of not planning at all, is not knowing the difference between tax avoidance (legal) and tax evasion (illegal).
Tax avoidance is using our “beloved” tax legislation to reduce one’s tax liability, by taking advantage of beneficial tax-law provisions. For example, securing a tax relief, utilizing tax credits, and making maximum use of all applicable tax breaks available. This is the objective of tax planning.
On the other hand, tax evasion is seen as an illegal attempt to avoid filing or paying taxes, which could land you in jail. This includes failure to file returns and non-payment or underpayment of taxes. I often hear persons say, “I wasn’t evading, I just didn’t know.” Well, sad to say, all laws are considered public knowledge, as such, ignorance of the law cannot be used as a defence. Consequently, you will still be held liable for tax evasion though you may be unaware that the practices you are engaged in is considered as such.
Last Word
We all know that our tax laws change almost every year, and the new rules and regulations seem to become increasingly complicated. Therefore, the importance of keeping abreast of changes and implementing sound tax strategies cannot be overemphasized. One of the best ways to achieve this is by seeking professional tax planning help – this is usually money well spent. Ensure however, that whomever you are engaging to assist with your tax planning needs has verifiable tax experience, to avoid being short changed.
