Engaging in long-range tax planning is a wise decision for any business. By proactively tackling the planning process, you may be able to reduce your liability while avoiding unforeseen twists at tax time.
While bigger companies should take more care to do their planning well in advance, organizations of any size especially growing businesses can see significant benefits from initiating an early review of possible savings and potential tax-time issues.
Six months before the end of a company’s tax year is an ideal time to start the planning process says, Carl Pon, co-managing partner of Vicenti, Lloyd & Stutzman LLP. “At that point, you have a reasonable idea of how the year is likely to turn out and you also have six months to implement whatever tax saving ideas you come up with,” he explains.
Smart Business spoke with Pon about long-range tax planning, who should be involved with the process and why it can pay to play the role of devil’s advocate.
What advantages can a company gain by engaging in long-range tax planning?
There are three that readily come to mind: You can minimize tax payments, you can avoid unpleasant surprises and you can take greater advantage of the appropriate tax loopholes that are available. Sometimes when tax planning is done at the very last minute, a company hoping to knock down their tax bill will decide to make certain expenditures which aren’t necessarily the best use of their capital. If you take a more long-range view, you can make sure that the outlays you are making provide the greatest economic bang for the buck as well as tax savings.
Does a company’s size or rate of growth affect how long-range tax planning should be conducted?
With regard to size, the bigger the company is the sooner you should do long-range planning because a smaller company is more nimble and more quickly able to implement things. There is the metaphor about being able to turn around a 20-foot ski boat in a very short period of time, but if you are driving a super tanker it can take miles to change course. The rate of growth is important because the faster you are growing, the more risk you are exposed to. These could be risks of outgrowing your cash, outgrowing your capital, your people or your systems. Dealing with those uncertainties is perhaps a bigger challenge than dealing with the tax issues.
Who should be involved with long-range tax planning and why?
Primarily, there should be three parties involved: the owners of the business, the top management of the business and the tax advisor. Often, with our client base we find that owners and top management are the same. This is not always the case, however, and the owners and management may have different expectations of what they want the business to produce. It is good to have a group meeting to make sure you don’t plan an optimum strategy that doesn’t meet the desires of a party not at the meeting.
What types of questions should be asked when meeting with a tax advisor?
One of the excellent questions to ask is how aggressive and/or defensible is the position that is being taken because the risk of audits is now on the upswing. Another important thing is to take the devil’s advocate position and ask: Why should I not do this? Sometimes we find businesses at the end of a good year deciding to implement a very expensive pension plan. In a good year this is not a hardship for the business to fund, but in a bad year it can be very difficult. In addition to that, sometimes the one big year of funding creates unrealistic expectations among employees. When a bad year does arise, employees may not be very understanding as to why pension funding isn’t as large as it was in previous years. By playing the devil’s advocate, you can temper the decision to move forward with full knowledge of all possible consequences.
In addition to long-range tax planning, what are some other proactive steps that companies can take to strengthen their financial outlook?
Doing cash flow projections on a regular basis helps a company ask “what-if” questions and to be better prepared for unexpected changes in cash flow. It is also important to have a working capital credit facility in place before you need it because the ideal time to talk to lenders is when you’re not faced with an urgent need.
CARL PON is co-managing partner of Vicenti, Lloyd & Stutzman LLP. Reach him at CPon@vlsllp.com.