Year-End Tax Planning Gives You the Advantage

Make Tax Planning Part of Your Year End

…in this world, nothing is certain except death and taxes.  – Benjamin Franklin

Filing and paying annual income taxes may be an integral part of doing business, but that doesn’t mean you have to like it, nor pay more than your fair share. Whether you face the task with acceptance, resignation, or dread, you know it’s inevitable once the year ends, and you close your books. The question is, when do you start to address your year-end tax planning?

Running a successful business means keeping abreast of new rules, laws, regulations, and lately, mandates which impact not only costs, but how you manage both day to day, and long-term activities. You have enough on your plate without trying to keep up with the changing environment for income taxes too.

Your customers or clients depend on you to be the expert in your field. Call on HKMP to keep you abreast of changes in tax laws which impact you both positively and negatively, allowing you to focus on your own areas of expertise, while protecting your business interests, and cash flow. Don’t miss the opportunity to take advantage of HKMP’s expertise to review your books and records prior to year-end, and advise you of opportunities to minimize your tax liability. Our knowledge and experience will ensure you make informed decisions like scheduling expansion, and major purchases in years when tax laws are more favorable.

Take Advantage of the Right Timing

Timing is everything. Whether it’s capital investments, year-end bonuses, hiring, or inventory, you want to make informed decisions. In many of these areas, you’re already doing your research, and mapping out a plan before reaching final decisions. Yet all too often, the impact on both your current and future tax liability is overlooked. In many ways, it’s as important as ROI.

One area which has seen significant change over the last 40 years or so is depreciation. Not only have Section 179 limits changed over the years, but so have limits on first-year depreciation. Looking back, a mere 13 years, the Section 179 limit has grown from $250,000 in 2008 to $1,050,000 in 2021. Not all years have seen increases, but don’t you want the option of deciding whether to escalate or delay a major purchase if the limit increases the following year?

Many companies experienced decreased revenue, and increased costs for the last two years thanks to COVID. As you prepare your budget for 2022, knowing how those costs will affect both actual and projected net income will keep more money in your pocket. Better still, you’ll have more money to spend on the original dream with which you launched your business in the first place.

Year-end tax planning areas

Protect Your Investments With Year-End Tax Planning

Would you wait until January of February to create next year’s budget? Probably not, as you know you’d start the year blind to objectives and opportunities. You don’t wait until January or February to start making estimated tax payments either, as you don’t want your cash flow to take one, large hit. You certainly haven’t achieved your current level of success by ignoring the numbers, or failing to see how they measure up to your projections and expectations.

Tax laws can be shark-infested waters. If you’re unprepared, they can bite off far more than you’re willing, or even able at times, to give. Knowing there’s an expert ready to take the wheel and guide you through those waters unscathed protects your assets, leaving you free to focus your attention and resources on the present challenges, and future opportunities.

Ask yourself this. If your dream was important enough to create a plan, and map out at least part of the route to making it a reality, isn’t it equally important to allocate time, energy, and resources to protect what you’ve built?

Scout Ahead to Minimize Setbacks

To put it simply, year-end tax planning is the security team’s scout who heads out before dawn to ensure the way forward is clear of perils and pitfalls. He alerts you to blocked roads, washed out bridges, and potential ambushes, giving you time to set up defenses, and re-map your route. Without him, you’d walk right into those ambushes, or find yourself mired in quicksand, causing expensive delays and missed opportunities. Clearly, the money you spend on his services will be recouped many times over.

You could choose to fly by the seat of your pants, hoping your business grows, and thrives. You can navigate the expensive mistakes, in the belief they’re simply a cost of doing business. Or you can build a team which includes people who are there to protect what you’ve built, and clear the way forward. I’m guessing you didn’t take unnecessary chances when you first started out, nor did you try to do more than you had to by yourself.

If you’re ready to clear a few obstacles from your path, HKMP is the scout you need to navigate the tax waters, and avoid the sharks.

Sales and Use Tax For Online Sellers After the Wayfair Case

It has been nearly three years since the U.S. Supreme Court decision was handed down that changed sales and use tax rules for online sellers. Known as South Dakota v. Wayfair, Inc., or simply as the Wayfair case, the ruling removed the physical presence requirement for sales tax nexus.

As a result, states can now require businesses to collect sales tax on goods and services sold in the state even if the business has no physical presence in the state. The ruling primarily affects online businesses and companies that sell via mail or telephone order (sometimes referred to as MOTO businesses).

Surprisingly, many companies have yet to adapt to the ruling. Often companies have heard of Wayfair but haven’t done anything about it.

Here are some of the most common questions clients have about how they can keep up with their sales and use tax obligations.

How does a company know where to file sales and use tax?

To know if it has a filing responsibility, a company needs to understand state law and how it applies to the company’s activities in the state.

Wayfair expanded states’ ability to require out-of-state companies to collect the state’s sales tax. Now, states can require out-of-state companies to collect the state’s sales tax if the company has sufficient “economic presence” in the state.

The most common economic threshold for a sales tax requirement is $100,000 in sales or 200 transactions in a state. The traditional parameters, however, such as whether a company has an employee presence or physical locations in the state, still apply. Complicating the situation, each state has its own parameters for determining when sales and use tax needs to be collected.

How can companies be sure they’re calculating sales and use tax correctly?

Calculating sales and use tax requires an analysis of state law and an understanding of the state’s sourcing rules. Depending on the state, some transactions are taxed all the time while some are circumstantially exempt.

Typically, a state will source a sale to the jurisdiction where the good is sold or delivered. Identifying that particular jurisdiction, however, can be tricky. Most states have a tax rate lookup system that enables companies to search for the correct jurisdiction and rate. However, it can be daunting when a company has thousands of customers with different addresses. Complete accuracy would require a check of every single transaction.

Alternatively, a company can invest in sales tax automation software. Whether that software produces the correct result depends on whether the correct information was input at the start.

What are the greatest challenges for companies that want to handle sales and use tax compliance in-house?

These companies face three main challenges: personnel, cost and risk. Calculating sales tax in-house requires at least one individual who is more than just knowledgeable about sales taxes. Companies that invest in such a person risk that person moving on and taking their knowledge with them. Also, calculating sales tax isn’t really a full-time job. Returns are typically due around the 20th of the month, so there’s a lot of downtime for an inhouse sales tax expert.

In addition, compliance and research software costs may be associated with handling sales and use tax in-house. Finally, if the person handling sales tax doesn’t rise to the expert level, there’s increased risk that the decisions made will turn out to be incorrect. This may lead to taxes, penalties and interest upon audit.

What tools can companies use to help with sales and use tax compliance?

Software can help, but the more complicated the software, the more expensive it gets. Also, software needs to be set up correctly and checked often to ensure its accuracy. This requires an expert.

Another option is to outsource the function or employ a hybrid solution. For example, a company could work with a sales tax expert on a quarterly basis to make sure filings are occurring in the right states, tax is being charged when it should be, and tax is being calculated correctly and for the right jurisdiction.

Although sales tax is often the smallest item on the invoice, companies should take it seriously. States will be motivated to go after out-of-state companies that haven’t been filing when they should have.

Contact us if you’d like assistance getting a handle on your sales and use tax obligations.