Engaging in long-range tax planning is a
wise decision for any business. By
proactively tackling the planning process, you may be able to reduce your
liability while avoiding unforeseen twists
at tax time.
While bigger companies should take
more care to do their planning well in
advance, organizations of any size — especially growing businesses — can see significant benefits from initiating an early
review of possible savings and potential
tax-time issues.
Six months before the end of a company’s
tax year is an ideal time to start the planning process says, Carl Pon, co-managing
partner of Vicenti, Lloyd & Stutzman LLP.
“At that point, you have a reasonable idea
of how the year is likely to turn out and you
also have six months to implement whatever tax saving ideas you come up with,”
he explains.
Smart Business spoke with Pon about
long-range tax planning, who should be
involved with the process and why it can
pay to play the role of devil’s advocate.
What advantages can a company gain by
engaging in long-range tax planning?
There are three that readily come to
mind: You can minimize tax payments, you
can avoid unpleasant surprises and you
can take greater advantage of the appropriate tax loopholes that are available.
Sometimes when tax planning is done at
the very last minute, a company hoping to
knock down their tax bill will decide to
make certain expenditures which aren’t
necessarily the best use of their capital. If
you take a more long-range view, you can
make sure that the outlays you are making
provide the greatest economic bang for the
buck as well as tax savings.
Does a company’s size or rate of growth
affect how long-range tax planning should be
conducted?
With regard to size, the bigger the company is the sooner you should do long-range planning because a smaller company
is more nimble and more quickly able to
implement things. There is the metaphor
about being able to turn around a 20-foot
ski boat in a very short period of time, but
if you are driving a super tanker it can take
miles to change course. The rate of growth
is important because the faster you are
growing, the more risk you are exposed to.
These could be risks of outgrowing your
cash, outgrowing your capital, your people
or your systems. Dealing with those uncertainties is perhaps a bigger challenge than
dealing with the tax issues.
Who should be involved with long-range
tax planning and why?
Primarily, there should be three parties
involved: the owners of the business, the
top management of the business and the
tax advisor. Often, with our client base we
find that owners and top management are
the same. This is not always the case, however, and the owners and management
may have different expectations of what
they want the business to produce. It is
good to have a group meeting to make sure you don’t plan an optimum strategy that
doesn’t meet the desires of a party not at
the meeting.
What types of questions should be asked
when meeting with a tax advisor?
One of the excellent questions to ask is
how aggressive and/or defensible is the
position that is being taken because the
risk of audits is now on the upswing.
Another important thing is to take the
devil’s advocate position and ask: Why
should I not do this? Sometimes we find
businesses at the end of a good year deciding to implement a very expensive pension
plan. In a good year this is not a hardship
for the business to fund, but in a bad year it
can be very difficult. In addition to that,
sometimes the one big year of funding creates unrealistic expectations among
employees. When a bad year does arise,
employees may not be very understanding
as to why pension funding isn’t as large as
it was in previous years. By playing the
devil’s advocate, you can temper the decision to move forward with full knowledge
of all possible consequences.
In addition to long-range tax planning,
what are some other proactive steps that
companies can take to strengthen their financial outlook?
Doing cash flow projections on a regular
basis helps a company ask “what-if” questions and to be better prepared for unexpected changes in cash flow. It is also
important to have a working capital credit
facility in place before you need it because
the ideal time to talk to lenders is when
you’re not faced with an urgent need.
CARL PON is co-managing partner of Vicenti, Lloyd & Stutzman
LLP. Reach him at [email protected].