The Profitable Intersection of Tax Planning and Business Growth

A new year means a new opportunity for growth. If you’re like many business owners, you’re looking at the year ahead with optimism and motivation to grow and expand. But in order for your business to grow, you first need to define your vision and mission. Only then can you set your goals and a plan of action to reach those goals. 

What will your goals entail?

• Do you need to hire more people?
• Will you spend more on marketing and advertising?
• Which direction is our business headed?
• What do you need to reach your goals?

The path to achieving your goals and the payoff (hopefully higher profits) will likely have tax implications. When creating your growth plans, it’s important to keep their tax impact in mind. Tax planning can work alongside your growth strategies to help you reach those goals while maximizing cash flow. 

To understand how these two areas intersect, it’s important to understand what tax planning is and why it’s important for your business.

What is Tax Planning? 

Tax planning is the strategic process of reducing and managing your taxes. It’s not something you do when filing your taxes, nor should it be confused with tax preparation. Rather, tax planning is an ongoing process that aims to manage your financial situation to minimize taxes now and in the future.

Tax planning can also be an effective way to maximize deductions and avoid tax penalties.

Effective tax planning will consider the timing of a lot of things. Here are just a few:

• Purchases, such as equipment (Section 179) allows you to deduct up to $1 million on equipment purchases)
• Major business decisions, such as the expansion of a product line
• Increased revenue
• Major life decisions

Tax planning can also apply to employee benefits, which may provide a tax deduction. 

Each of these events can have significant tax implications, but with the right tax planning strategies, you can reduce your tax burden without compromising your goals or growth.

Minimizing your tax liability will give you more cash for:

• Investment
• Expenses 
• Growth

Ideally, formal tax planning should throughout the tax year. This will allow you to implement strategies that will affect the current year and get a jumpstart on the year ahead. Working with an experienced tax professional is recommended. 

Why is Tax Planning Important?

Tax planning is vital for any growth-focused business because it affects your cash flow. The greater your tax burden, the more cash-strapped your business will be. 

Effective tax planning allows you to:

• Reduce your taxable income
• Take advantage of all tax credits and deductions
• Support the growth plans for your business

Reducing your tax liability will free up cash that you can use to invest in your business. Those investments can also support your tax planning strategies and help you reduce your taxes the following year.

Growth and tax planning can complement each other, or they can work against each other. Let’s take a closer look at how growth and tax planning intersect, and how they can work together to help you reach your goals.

How Does Business Growth Relate to Tax Planning? 

Business growth generally means increased revenue and, ultimately, higher taxes. But growth also means investing in your business. To grow, you need capital. Proper tax planning can reduce your tax burden to ensure you have the cash you need to carry out your plans.

Creating your growth plans and tax planning strategies simultaneously can help you reach your goals while minimizing your tax burden and protecting your cash flow.

Here’s how your growth strategies and tax planning can work together.

Set Goals with the Right Intentions

When setting and assessing your goals, consider the tax implications. Tax planning should not steer the course of your business or determine how you spend your cash. 

However, you should consider how your growth will affect your taxes and plan for the outcome.

Understanding the tax implications of your goals can help you formulate strategies – with the help of a tax professional – to reduce your tax liability. 

Rather than allowing your tax planning strategy to dictate your future, you’re using your growth strategy to fuel your tax planning strategy.

Spend in the Right Places

Many businesses make the mistake of spending just to save money on taxes, and they see nothing in return. Spending $80,000 just to save $20,000 in taxes won’t benefit your business or help you reach your growth plans unless you’re investing in the right places.

Your growth strategy and tax planning can work together to help you find the best places to accelerate expenses. Spend where it makes sense, and you can reduce your taxes while helping your business grow. 

You’ll make more money growing your business than you will by spending just to save on taxes.

A solid tax strategy can help you make more informed business decisions and find the most impactful places to focus your spending.

Find Missed Opportunities

Saving money on taxes is important, but if it becomes your only focus, you may miss out on more valuable opportunities that can support your growth.

For example:

• You may not want to tie your money up in a defined benefits plan if you plan to hire new employees or invest in new equipment.
• It may not make sense to purchase a new company car if you really don’t need one just for the sake of reducing your taxes.

Consider where and how you can spend to grow your business. Analyzing your goals and tax planning strategies can help you find opportunities for smart investments that will benefit your business over the long term.

Final Thoughts

Business growth affects tax planning and vice versa. The two are inexplicably linked. But they can work together to move your business in the direction you want while reducing your tax burden and maximizing cash flow.

Working with the right tax planning professional is key. Someone who understands your business and your goals can help you achieve your desired outcome. 

If you want to grow your business and reduce your taxes, we need to talk! Schedule a call today. 

Stay tuned for our next blog to learn about growth-focused tax planning strategies!