Jessica Veiga
Just like there’s a really, really big difference between tax avoidance (lessening tax liability is legal) and tax evasion (the deliberate under- or nonpayment of taxes is criminal), there’s a big distinction between tax planning and tax filing. Unfortunately, for most people, it’s an unfamiliar distinction.
The good news is, it's not terribly difficult to explain to your clients. The short version goes something like this:
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Tax filing is when you prepare and submit your tax return to the IRS by a determined deadline.
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Tax planning is working with a financial professional to make sure you use the tax code to your greatest advantage.
It’s a popular myth that there are over 70,000 pages in the tax code, but the true number is still well over 4,000 pages. Is it any wonder no business person has the time to read it? Luckily, businesses have tax pros like CPAs, accountants, and bookkeepers who stay current with new and updated tax codes, making them well prepared to help businesses understand the major differences between planning and filing. Here are three differences worth discussing with your clients:
1. Tax planning requires understanding tax requirements, tax payment, and return preparation, as well as a knowledge of business accounting.
There are big differences between income, self-employment, employment, sales, and local taxes.
Each of these taxes is based on different criteria and has distinct filing requirements. With income taxes, for example: partnerships, sole proprietorships, S-corps, and LLCs show their net profit on personal income tax forms. C-Corps, on the other hand, pay corporate taxes. And don’t forget to remind them about state, city, and county taxes!
2. Tax planning is long-term.
Good tax planning looks into the future and helps to better plan and benefit from existing tax rules. It’s a time-consuming process that requires a high level of knowledge and engagement. It's tedious work very few business owners can do well on their own, so your clients will be thrilled to hear you can help them save money on their next return.
Meeting with you on a regular basis helps your clients get proactive tax and accounting advice. That’s why planning is about much more than preparing tax returns. It’s an ongoing process where you and your clients analyze their previous tax returns and current financial standing to ensure future returns are more tax-efficient and beneficial to their companies' growth and profits.
3. Once it’s time to file taxes, it’s too late for planning.
Income tax planning must be a year-round activity. The sooner you explain this to your clients, the better. The last thing you want is for them to roll up in your office or your email asking about saving money a week before returns are due. Here are just a few of the items you can tell clients you should be tracking throughout their company’s fiscal year:
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Employer-sponsored retirement plan contributions
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Eligibility to make tax-deductible contributions to a Traditional or Roth IRA
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Any long-term capital gains they might be able to realize
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Whether they should prepay future charitable donations, etc.
Tax planning, as you already know, is unique to each individual and organization—but your client might think it's more paint-by-numbers. Some strategies will work for them, others will not. It's worth emphasizing that one size does NOT fit all, as business owners do sometimes try to emulate what their successful peers are doing. If they don't understand the very changeable nature of best practices on a case-by-case basis, they might be looking for you to make a move for them that's at best ill-advised, and at worst a violation of the tax code in their specific situation. Helping them understand this early on can save you both some heartache.
How Bookkeeping Helps with Both Tax Planning and Filing
Accurate bookkeeping is any business' perfect year-round partner in tax planning and filing. Tasks like paying bills, invoicing customers, and entering transactions are done on a consistent basis. Employee payroll, bank reconciliations, and entry adjustments keep a business operating smoothly. And monthly Profit & Loss reports, Accounts Receivable and Accounts Payable aging schedules, and balance sheets get them geared up for tax time. Come tax time, all that information can be used to quickly and easily file their various federal, state, and local tax returns, including payroll, sales, and income tax. They also get all the W2s and 1099s they're required to issue.
Bookkeeping is such a key part of tax filing AND planning, that few firms will argue it isn't an essential function of what they do. But bookkeeping itself can be both low-margin and high-use of your firm's resources. If you'd like to improve those bookkeeping margins, while freeing up valuable employee time for more client consultations, business development, and profit driving, Botkeeper is the perfect solution. At only $69/client per month, Botkeeper's artificial intelligence and machine learning can auto-categorize transactions with tremendous speed and accuracy from the start—and it only gets better and smarter over time. Using it will allow you the space you need to have more client conversations like the one we just covered.
