Is tax season really over? While the filing deadline for individual and corporate taxes has come and gone (unless of course, you’ve extended), from a strategic standpoint, tax season may be over, but the need for tax planning is really an omnipresent one.
There’s always a sense of relief once taxes are filed. It’s an annual chore that, dare I say, nobody loves to do. But everyone I know loves when it’s done. They like getting it checked off their list so much that very few clients want to talk or think about taxes or tax planning for the rest of the year. That is, until tax time comes around again.
But that is, in my opinion, a mistaken. In fact, paying attention to your tax situation outside of tax season is worth more than you might think. A few people I know even made it their hobby to figure out ways to pay less in taxes. I’m not suggesting you must go that far. But you should have a good understanding of why the traditional “tax season” doesn’t mean anything to you and your agency business and how agencies can benefit from tax planning.
The Misnomer of “Tax Season”
Other than getting your own taxes filed at the beginning of each year, “tax season” is a misnomer for anyone outside of the tax preparation industry— where the term got coined in the first place. Tax season is really tax FILING season. Which is an important distinction, so you know where your focus should go.
Yes, it’s important to get your tax return filed on time. But keep in mind that filing is the end of a year-long cycle where you should be seeing results of everything that happened in the past year. Most people view their tax returns reactively. It’s just an event that happens to them every year but, with a little proactive work and a shift in perspective it can be a positive event.
Taxes Are an All Year-Long Reality
One of the biggest concepts to remember is that “tax season” is really an all year long season. You may not like to hear that but, let me explain. Every financial decision you make in your agency, personal life, and with your investments affects your tax return. There are hundreds of transactions that affect the taxes you must pay—and they happen all year long. Why shouldn’t your agency tax planning happen throughout the course of the entire year as well?
The takeaway here is that there are hundreds of opportunities to minimize your income taxes throughout the year. But it is an effort that starts now, not during tax filing season next year. It doesn’t matter how good your tax preparer is with a stack of receipts and paperwork. If you didn’t know you could structure your agency business in such a way that it would result in a reduction in your taxes, or that you could get a deduction on your personal taxes for your your daughter’s braces or your son’s overnight camp, it’s too late for this year. But there could be something you can do about it for next year.
How to Approach Tax Planning for Your Agency
So, how to approach tax planning for your agency? It’s really not all that difficult, and it really is incredibly important. Since this is such a massive topic, let’s boil it down to the top three things to do to approach and integrate tax planning for your agency right away.
1) Develop a rock solid, written, comprehensive agency tax plan
Tax planning is more than getting a few ideas from your tax preparer when you pick up your tax return in April. You know the drill. You don’t like how much tax you have to pay, so you ask what else can be done. They give you some ideas off the top of their head. Most of the time it is some version of “buy more stuff” and “make less money.”
For your agency business (and your personal tax planning), you need a tax advisor who has a proactive attitude to consciously minimize your tax liability. It never happens by accident. True agency success doesn’t happen by accident either—it takes planning, execution, and expert guidance. Tax planning is no different. Work with your preparer to create a solid plan with concrete steps to help minimize your agency tax burden.
2) How is your business structured and WHY?
The number one tactical mistake I see agency owners make is they haven’t established the correct entity structure. What kind of structure do you have? Are you a sole proprietor, a partnership, a corporation or an S Corporation? Do you have more than one? If you don’t know, that’s the first problem. This structure is the one thing that determines how most of your income is getting taxed every single year.
So, step one is know how you file. Step two is know WHY you file that way. What are the tax benefits? Are you taking advantage of them all? Nine out of 10 service business owners who come to me with an S Corporation say it’s because “that’s what their tax guy told them to do.” More often than not, it’s not the right answer.
The S Corporation is a tool, but you must use it correctly. And a lot of times it’s not the only tool you should be using. Minimizing your taxes takes effort and focus on putting the right tools into your toolbox.
3. Who brings you ideas for saving tax?
What’s the answer to the question “Who brings you ideas for saving tax?” If the answer isn’t your accountant or tax advisor, then chances are good you’re working with the wrong firm. If you are the one always bringing up money-saving ideas to your tax advisor, that is a big red flag and you’re likely overpaying your taxes. The most common remark I hear when working with a new client is that the same person has been preparing their taxes for years. Unfortunately, this could be hurting you.
Think objectively about this one. When was the last time your tax advisor came to you with an idea to save you money? If the answer is never or hardly ever, it’s time to reassess. Don’t get me wrong. Your tax advisor and firm may be doing a great job for what you hired them for—tax preparation. Most preparers don’t have a proactive focus to help their clients save money. It’s just not how they’ve been trained.
A proactive advisor will start by looking at the full financial picture of your agency. This includes your agency, your personal life, family, income, and investments. Then they’ll craft a plan to help you take advantage of all the opportunities that currently exist to lower your tax bill.
Now that you have the knowledge, make sure you don’t neglect tax planning for your agency until the next filing season. There’s a saying that I like that simply states, “If you don’t like what’s happening in your life, change it.” If you’re not happy with the amount of taxes your agency paid this year, change it. But you must start doing the work now.