Good planning can reduce IRS tax payments

We have arrived at that time of year again when procrastination is not rewarded, but penalized if you fail to pay income taxes on time.

Oh sure, you can file for an extension -- procrastinators love to do that -- but you will still need to file. Last year you promised yourself that tax planning would be a goal of your strategic plan.

Taxes are inevitable. Wisconsin's small businesses annually contribute a significant amount of money to the state's treasury, but that doesn't mean you should be giving more than you need to.

Tax planning allows businesses to better allocate precious resources and make decisions that will best utilize all of those resources. Small businesses need to be aware of their options for reducing tax obligations.

Reduce income

One method for minimizing your tax due is to reduce income. Some people might say that doesn't make sense. What business owner would want to reduce a company's income?

A prudent business owner finds ways to reduce income by increasing expenses that do not directly affect cash flow.

One of those tools is depreciation. Depreciation shows up on the income statement as an expense, but it differs from other ordinary expenses in that you do not write a check to cover the depreciation expense.

This is an accounting entry that allows you to write off a portion of the usable life allocated to fixed assets based upon the life determined by the IRS.

If some of your equipment needs to be replaced, speak with your accountant about when that should be done to take advantage of those tax breaks generated by depreciation.

Prepayment of invoices is another method for reducing your tax obligation. Paying invoices before the end of the year, even though they are not due until January, can help reduce the business/owner taxable income. Think of this in terms of someone paying a property tax bill for their home at the end of December to take advantage of that deduction.

Many businesses accumulate inventory and frequently some of that inventory becomes obsolete. Again, have a discussion with your CPA on the best method for getting rid of the outdated material while remaining in compliance with state and federal laws.

Minimize inventory

Keep in mind, inventory is not our friend:

n It requires precious resources to own the inventory (cash).

n It takes up space (requiring capital investment).

n Inventory can be damaged, stolen or become outdated.

As you plan for next year, look for strategies that will minimize or eliminate inventory wherever possible.

Taxes are an inevitable result of a successful business. Finding ways to legally reduce your tax obligation is a never-ending challenge.

It is too late to affect your tax position for last year but it is still early enough to have a beneficial impact on the taxes you will owe as a result of this year's activity.

I encourage you to make contact with your financial adviser to begin structuring a plan for tax minimization.

Paying your fair share is a good thing. Legally making your fair share as small as possible is even better.

Bud Gayhart is director of the Center for Innovation and Business Development at UW-Whitewater.