Tax Planning, Staying Afloat and Staying Profitable in the Downturn

January 15, 2013

Given the continuing economic downturn, business owners are well-advised to take all the necessary measures to stay afloat and stay profitable – or else face bankruptcy and closure. One such essential measure is effective tax planning with the expert assistance of experienced accountants. Unfortunately, many business owners still believe that it is unnecessary, to say the least. The rationale: Since the business will experience lower pre-tax income, the income taxes payable will also be lower, if not entirely disappear in case of a loss. Therefore, planning is unnecessary, not to mention a waste of precious resources on the professional fees paid to the accountant.

But this is not so! Effective tax planning is more important during an economic downturn than in economic prosperity. Experts agree that it is a matter of necessity during times of economic peril because the tax savings generated can mean the difference between the business collapsing and surviving the recession.

Neglect tax-related planning and you put your business in jeopardy. Just make sure that you hire the best Rochester accountant to come on board during the planning activities. So how can tax planning improve your business’ chances of staying afloat and staying profitable during tough economic times?

Let’s start with the improvement of the cash flow. Simply put, it refers to the inflow and outflow of cash in the business’ coffers from sales and purchases of products and services, from payment of employee salaries and benefits, and from payments of operating expenses. It must be emphasized that cash flow figures do not include non-cash items like depreciation and write-offs.

Think of cash flow as the lifeblood of the business. With little cash inflow yet the cash outflow remains level, the business is in danger of collapsing in on itself. With effective tax planning, fortunately, such situation can be abated in several ways including:

• Refund the taxes paid in previous years

• Defer the taxes to the next year

• Take advantage of tax credits

• Identifying non-taxable income

Basically, the best Rochester accountant will find ways to lessen the current year’s taxes. This means increasing your profits; think higher revenues and lower expenses equals higher profits.

And then there is the tax impact of net operating losses reported for the current year. Under current Internal Revenue Service rules, corporations are allowed to apply their current net operating losses to their earlier tax payments. The resulting difference can be claimed as refunds for taxes paid in these years, which means immediate cash flow benefits.

Take for example this scenario. In 2010, your business paid taxes of $22,000 for the year’s taxable income of $100,000. In 2011, you reported a net operating loss of $100,000; you will then be eligible for a refund of the $22,000. The best Rochester accountant will also provide for several tax deferral techniques during your tax planning sessions. These techniques include changing the method of accounting and deferring the payment of liabilities to a future time. The ins and outs of these techniques are best left to the professionals.

Many of the effective tax planning techniques are valuable toward ensuring that the business stays afloat despite the current economic crisis. Tap into these techniques now and trump your competitors!

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RDG+Partners wants to be the primary advisor for motivated business owners. The firm is committed to providing boutique level accounting, tax and business consulting services to the Rochester, NY community.