“Minimizing and managing income tax expense is an ongoing issue for any profitable business,” says Glenn Gelman, managing director at Santa Ana-based Glenn M. Gelman & Associates, “yet few companies actually take the steps required to reduce their tax burdens.”
Smart Business spoke with Gelman about some key strategies that companies can use to manage and minimize their tax obligations.
Why should companies be thinking about creative ways to minimize their taxes right now?
This is an ongoing concern for any profitable business that’s faced with the issue of reducing and managing income tax expense. Additionally, the IRS has increased the number of audits and the quality of those audits through automation, which means companies have to go about doing this in a legitimate, above-board manner, or risk having to pay hefty penalties and fines.
How can businesses go about minimizing their tax burdens?
The first step is to take advantage of the various types of pension plans that are allowable by IRS Code. You can chose from profit-sharing plans, pension plans, defined-benefit plans and others. All of these help reduce taxable income for an employer. And while companies are not allowed to discriminate in favor of highly compensated employees, there is a great deal of creativity that can be used by reputable, knowledgeable professionals in the profit-sharing/pension arena that allows for tax reduction for the employer.
What other strategies should companies be using?
They can also control the timing of income and use accounting methods to minimize their taxes.
If, for example, a firm is a cash-basis taxpayer, it can defer income from one year to another, thereby minimizing or delaying the tax. If the company pays taxes on an accrual basis, then it will want to be sure to accrue all expenses that it possibly can to minimize taxable income. The key is to use an accounting method that reflects the company’s taxable income.
Tax credits are another way to reduce tax burden. There are research and development credits, manufacturing credits, enterprise zone credits and other options, depending on the company’s line of business and location. Enterprise zone credits, for example, apply to companies that are located in (or, that have employees who live in) certain zones of a city or county that are defined as ‘tax favored.’ These firms are generally eligible for significant credit at either the federal or state level. To take advantage of these tax savings, business owners should work with an accountant who is familiar with the credits, and with the company itself.
Do businesses do enough to minimize their tax burdens, or not?
They don’t do nearly enough to plan for the current year, nor do they implement long-term tax strategies that can help. This is a major weakness, especially among smaller companies that are afraid of paying professional fees and unaware of how the tax savings would far outweigh the cost of those fees. If an employer really wants to get the benefit of every tax deduction available, then he or she must work with professionals who are familiar with every single type of deduction available.
What other tax tips can you offer business owners?
They need to get started right away, and plan major shifts or strategies months in advance. Companies may opt to be taxed as S-Corporations, for example, instead of traditional C-Corporations. Or a company might want to be able to deduct life insurance premiums by paying for them with a pension plan. At a more complex level, a corporation may want to take advantage of more aggressive strategies, such as spinning off a division.
Regardless of which strategy is being used, they must all be planned carefully in advance in order to achieve the maximum benefits. There are effective ways of dealing with everything, as long as you plan. If you wait until the last minute, then you haven’t done anything to help yourself.
GLENN GELMAN is managing director at Glenn M. Gelman & Associates in Santa Ana, Calif. Reach him at (714) 667-2600 or firstname.lastname@example.org.