Other taxes
As previously mentioned, the common misconception is tax planning is not necessary in a recession as a struggling business incurs little or no income taxes. However, this reasoning ignores the fact that while federal, state and local income taxes are a part of the overall tax burden, other taxes such as franchise taxes, payroll taxes and sales and use taxes can also be a significant expense for a business. Unlike income taxes, which will normally decrease in times of uncertainty, franchise taxes, payroll taxes and sales/use taxes ay remain constant or diminish only slightly. Therefore, in times of economic difficulty, these taxes become more critical to control.
Many employers see payroll taxes simply as a cost of doing business and don’t realize that specific strategies can be implemented to lessen payroll costs. Many businesses offer health insurance to employees in which the employees’ share of the premiums are paid with after-tax funds. Yet simple changes to the structure of the plan can allow these premiums to be paid on a pre-tax basis, thereby saving the employer significant payroll taxes. For example, a business owner providing health insurance to 20 employees, of which each employee has $5,000 deducted from his or her paycheck annually, can save $7,650 annually by providing a plan to allow these premiums to be paid on a pre-tax basis.
The corporate structure also plays a significant role in the payroll taxes incurred by a business owner. In a C corporation, a business owner often controls the corporate income by claiming significant salaries. Unfortunately, the business owner will incur a payroll tax liability that will rise as the salary increases. A recommendation to change the corporate structure can allow profits to be withdrawn from the business with no payroll taxes.
Many, but not all, states impose a franchise tax on a business for the privilege of doing business in the state. In some states, these rates re small, but several states impose substantial franchise taxes. In most cases, franchise taxes are imposed upon the business’ “capital.” Thus, a business can incur significant losses but still incur high franchise taxes. When cash flow is strained and profits have disappeared, these franchise taxes are a substantial burden.
Sales and use taxes can also be a significant burden for companies, especially asset-heavy businesses. These taxes are due regardless of a business’ profitability. For example, a business purchasing an asset worth $30,000 will generally incur a sales tax ranging from $1,200 to $3,000, depending on the combined state and local sales tax rates. Again, entity structuring can lessen this burden by deferring the tax over a period of years rather than the tax being due immediately. Using the same example, the business would incur sales tax from $240 to $600 in the year of purchase rather than $1,200 to $3,000. This creates a substantial, immediate cash flow benefit that can allow a business to survive.
Conclusion
As illustrated, many comprehensive tax planning techniques can aid a business in surviving the current economic crisis. Proper implementation of these cash-increasing strategies can certainly be the difference between a business surviving and failing. Yet most tax professionals and preparers utilized by small- and medium-size businesses are occupied with the compliance aspect of the businesses or are simply not capable of identifying and adopting these strategies for their clients.
The complexity of comprehensive tax planning, especially in a recession, underscores the need to utilize the services of an accomplished tax planning firm that employs tax professionals with expertise in many areas of practice. The services of a firm well versed in recent legislation and the needs of small businesses may be indispensable to a small- or medium-size business struggling to survive the current economic downturn.
