Over the years, I have met with hundreds of potential clients. They all have something in common… when we start discussing what Weston Tax Associates can help them with (Spoiler alert #1: we can help you save thousands of dollars), most of them have the same answer: “We’re already working with an accountant. We’ve had the same guy for years. There is nothing you can do for us”
Some finally agree to let us look at their books and do a “back-of-the-napkin” type calculation to see what we could potentially save them. Once the number has been presented and digested, most clients thought their accountant was already doing this work for them.
Oh snap, Squirrel… he’s gone. I’m sure you’ve realized by now – this is a subject that lies near and dear to my heart. I’ve outlined some of my initial thoughts about how to look at this from a more basic perspective. You can access that article HERE.
This is when I have the compliance vs. planning discussion with them – which is what I’m about to share with you today.
Is There Really a Difference?
When it comes to taxes, most business owners focus on one thing – compliance. IN my experience, that is what most accountants do as well. They work tirelessly to ensure that their tax returns are filed on time and accurately. It seems like the responsible thing to do. Although compliance is critical, it’s only half the story.
The other half, tax planning, is where the real magic happens. By understanding the differences between tax compliance and tax planning, you can make smarter financial decisions, reduce your tax burden, and grow your business.
Let’s dive into the differences, unpack what each entails, and dispel some common myths about tax planning, such as the idea that it’s only for the wealthy. Spoiler alert #2: IT IS NOT.
Compliance Keeps You Legal, Planning Keeps You Profitable
Tax compliance is about meeting your obligations as a taxpayer. It ensures that you follow the laws set by the IRS and your state, avoiding penalties, audits, or worse. Compliance involves tasks like filing your income tax returns, payroll taxes, and sales tax reports accurately and on time. Essentially, it’s about ticking all the boxes to stay out of trouble.
Tax planning, on the other hand, is proactive. It’s about looking ahead, identifying opportunities to minimize your tax liability, and structuring your financial affairs in a way that aligns with your business goals. Tax planning often requires creativity, strategic thinking, and expertise in the tax code to uncover opportunities that might otherwise be overlooked.
For example, imagine a business owner who files their taxes every April, pays the amount due, and moves on with their life. That’s compliance. But imagine another business owner who consults with a tax strategist in December, identifies ways to take advantage of deductions and credits, and adjusts their strategy before the year ends. That’s the power in planning.
What’s Included in Tax Compliance?
Think of compliance as the routine maintenance of your business’s financial engine. It involves:
- Preparing and filing annual tax returns.
- Calculating and submitting estimated quarterly tax payments.
- Managing payroll taxes and filing W-2s and 1099s.
- Ensuring proper recordkeeping and reporting for sales taxes, if applicable.
- Responding to IRS notices or inquiries.
These are necessary actions that ensure your business operates within the legal framework. While they don’t typically save you money, they keep you from facing fines and penalties.
What’s Included in Tax Planning?
Tax planning is more like tuning up your financial engine for peak performance. It includes strategies such as:
- Selecting the right entity structure (e.g., LLC, S-Corp, or partnership) for your business.
- Maximizing deductions and credits unique to your industry.
- Utilizing retirement plans and health savings accounts to reduce taxable income.
- Timing income and expenses to minimize your liability.
- Leveraging tax-advantaged investments or benefits like depreciation and cost segregation.
- Integrating your tax strategy with your estate plan.
These strategies go beyond the basics of compliance. They require a deep understanding of your business, the tax code, and your long-term financial goals.
Do You Have to Be Wealthy to Benefit from Tax Planning?
One of the biggest misconceptions about tax planning is that it’s only for the ultra-wealthy. This couldn’t be further from the truth. While wealthy individuals and large corporations often have sophisticated tax strategies, the principles of tax planning apply to businesses of all sizes.
For instance, if you’re a sole proprietor earning $100,000 annually, you might benefit from transitioning to an S-Corp and paying yourself a reasonable salary. This strategy alone can save thousands of dollars in self-employment taxes.
Or, if you’re a small business owner, you could utilize a home office deduction, track mileage expenses, or set up a retirement plan to reduce taxable income.
Tax planning isn’t about your income level – it’s about knowing your options and making informed decisions.
Is Tax Planning Part of an Estate Plan?
Yes, tax planning often plays a crucial role in your overall estate plan. If you’re a business owner, your business is likely one of your largest assets. Effective tax planning ensures that your business transitions smoothly to your heirs while minimizing the tax burden on your estate.
For example, you might use tools like family limited partnerships, trusts, or gifting strategies to reduce the taxable value of your estate. Without tax planning, your heirs could face significant estate taxes, forcing them to sell assets or even parts of the business to pay the bill.
Integrating your tax plan with your estate plan isn’t just for the ultra-wealthy. It’s for anyone who wants to protect their legacy and ensure their loved ones benefit from the fruits of their labor.
Building a Team of Compliance & Planning
Having the right team behind you for both tax compliance and planning is like building a well-rounded medical team.
An accountant ensures your day-to-day financial health by handling compliance, much like a general practitioner addresses your overall wellness. However, a tax strategist dives deep into your unique financial “diagnosis,” uncovering opportunities to save and grow, similar to how a cardiologist focuses on heart health.
While some professionals may be skilled in both areas, many specialize in one, making it crucial to find the right fit for your needs. Together, these experts create a powerful partnership to keep your financial life healthy and thriving.
The Bottom Line: Planning is an Investment, Not a Cost
Tax compliance is non-negotiable – it’s what keeps your business on the right side of the law. But tax planning is where you unlock real value. It allows you to save money, reinvest in your business, and secure your financial future.
Whether you’re a small business owner or scaling rapidly, a tax plan tailored to your unique needs can help you keep more of what you earn. And the best part? You don’t have to do it alone.
Working with a trusted tax strategist ensures you’re taking advantage of every opportunity while staying compliant.
Welcome to the New Age of Accounting. Let’s begin.
