To Comply is to Obey. To Plan is to Be Smart.
With April 15th looming around the corner, we’ve decided to take on some of the trickiest tax questions for small businesses. We’ve talked about some of the smarter deductions as well as the perks of a CPA. Today, though, we’re going to talk about something that really trips people up – tax planning and tax compliance.
You probably already realize the difference, even if you’ve never used that specific language to describe it. But really understanding what distinguishes them from each other is important – it change the way you view filing your taxes and change how you manage your funds over the course of a tax year.
When you file your taxes, you are being tax compliant.
You’re reporting numbers as they occurred. Being accurate, truthful, and filling out all necessary forms entirely is the act of being tax compliant. Why is this an important distinction?
A lot of people tend to look at tax season as their opportunity to save money and to net themselves a greater return. People rush to make charitable (and tax deductible) donations in the winter, they ask their CPAs to find loopholes for them, and try to game the numbers so that they can minimize their tax commitment. This is faulty logic, and if you’re too aggressive you’ll leave yourself open to being audited.
The truth is, once you’re ready to file your taxes, aside from combing through your prior tax year for potential credits and possible deductions, there is very little you can do to actively change the outlook of your return. The best way to minimize your tax burden is to work year-round with that being your purpose. You want to be a careful and deliberate tax planner.
Tax planning is making it a point to think about how you want your filing to look at the close of the year.
It’s working with a CPA who knows federal and local tax code well and can help you minimize your tax load. A tax planner will work with a CPA to decide what sort of expenses they need to save receipts and/or have documentation for.
If you need to make a large purchase for your business, work with a CPA to decide how you can make the purchase tax deductible or perhaps earn a tax credit. Tax planning is being proactive so that when spring comes around, you’re just filling in numbers and checking boxes and you already have the best possible outcome for you and your business assured.
If you do try to manipulate and change the numbers, you run the risk ultimately of tax evasion.
Al Capone went to jail for tax evasion. You do not want to end up in hot water with your small business because you got too cute filing your returns. Being an efficient tax planner will enable you to avoid taxes, as opposed to feel the need to try to evade taxes. And we already learned how important THAT distinction is.