Tax Planning For Corporations: Strategic Approaches to Optimize Your Tax Position

Tax planning is about more than just staying compliant and paying what your startup owes to Uncle Sam. When it’s prioritized, it can be an important part of your startup’s strategy.

Many leaders tend to think of tax planning as a season where returns are filed and obligations are met. However, strategic tax planning goes well beyond just filing a tax return and taking the appropriate efforts to maximize any discounts and credits your startup qualifies for. When tax planning is prioritized, it can lead to improved cash flow, which can then fuel your startup’s growth.

In this sense, tax planning should be an ongoing process and not a seasonal scramble. Identifying and utilizing deductions and credits all year can help your startup better understand its tax burden and where it can improve liquidity and flexibility. This can help with income recognition and deductible expenses, which can help your startup optimize cash flow and set itself up for success beyond the tax year and into the future as well.

Year-round tax planning can also significantly improve investor relationships. If your taxes are in order and you’re complying with regulations, there’s less risk of audits, penalties and liabilities. This can help create a foundation for financial stability and reduce uncertainty, which are key things that investors look for. Investors also know that responsible tax practices can go a long way toward improved financial performance over the long term, which can further increase shareholder value and confidence in the startup.

Bottom line: Don’t think of business tax planning as something that just happens once a year; think of it as part of your startup’s business strategy.

Understanding Corporate Tax Planning Fundamentals

So how can you establish effective tax planning for your startup? It starts with setting the right foundation.

For instance, make sure you clearly understand the difference between tax planning and tax compliance and strive to take a more planning approach. Tax compliance tends to be more reactionary and focuses on fulfilling obligations under existing tax laws and regulations. When your startup performs tax compliance, it’s basically just focused on filing tax returns and paying taxes by the designated deadlines.

Conversely, tax planning tends to be more proactive. Unlike compliance, tax planning is best done year-round to appropriately assess your startup’s financial situation and make decisions to minimize its tax bill. Because tax planning is year-round and more comprehensive, it also helps startup leaders strategize for future financial efficiency and plan better for the future.

Corporate tax planning involves various fundamentals, including minimizing tax liabilities, ensuring compliance with tax laws and optimizing financial performance. It differs significantly from individual tax planning because you’re tasked with assessing your entire startup, and not just one person. Some of the key elements and considerations include selecting the right legal entity, preparing regular financial statements and tax filings throughout the year to identify areas for improvement, and ensuring that leadership is staying informed on any changes in tax legislation that could bring either challenges or tax advantages to your planning.

Corporate Tax Planning Strategies for Different Business Structures

Tax planning is not universal; strategies will vary based on your startup’s specific business structure. Some of the most common startup business structures are C-Corporation, S-Corporation and LLC. Here’s a closer look at the various tax planning strategies and implications for such startups. A good CPA or financial service partner can help determine which of the following business structures works best for your startup.

C-Corporation

These entities separate personal assets from business liabilities, which helps offer strong liability protection for your startup. However, C-Corps face double taxation, where profits are taxed at the corporate level and then again when they’re distributed to shareholders. The best tax planning strategies for C-Corps involve focusing on strategies that reduce corporate income tax, which may include working to maximize deductions and credits. Reinvesting earnings in a more strategic manner can also help.

S-Corporation

Unlike C-Corporations, S-Corporations have pass-through entity status, which helps avoid double taxation. However, while S-Corps can avoid self-employment taxes on distributions, the IRS requires S-Corp shareholders to be paid a reasonable salary for their services prior to distributions. Some tax planning strategies that S-Corps should consider include deducting ordinary and necessary business expenses to reduce taxable income, utilizing the home office deduction if startup leadership uses a portion of the home for work purposes and exploring fringe benefit deductions. S-Corps are also eligible for the qualified business income (QBI) deduction, allowing taxpayers to deduct up to 20 percent of their qualifying income.

LLC

Limited Liability Companies (LLCs) have more flexibility in how they’re taxed, thereby presenting some key opportunities during the tax planning process. For instance, single-member LLCs are taxed as disregarded entities, while multi-member LLCs are taxed as partnerships. It means that income and expenses pass to the owner or owners’ personal tax return, which helps avoid double taxation. Some strategies for maximizing tax deductions and credits include tracking business expenses, deducting common business expenses, taking advantage of the QBI deduction and claiming as many tax credits as you can. Additionally, you should be reevaluating your startup’s business structure on a regular basis to ensure that LLC remains the best structure choice.

Advanced Tax Strategies for Growing Corporations

The faster your startup grows, the more complicated its tax situation has a tendency to become. So, if your startup has reached a point of maturity, it’s important to consider more advanced tax strategies to ensure that you’re optimizing your tax position. Some of these strategies that are worth considering include:

Research and Development tax strategies:

The R&D tax credit is offered at both the federal and state levels to encourage innovation and investment in research and development. In order to qualify for the R&D tax credit, your startup must be able to prove that it:

• Developed or improved a business component
• Demonstrated a development based on science
• Showed that the development was able to resolve a problem

Additionally, the process of experimentation must be meticulously documented in order to earn the credit.

If your startup is eligible for R&D tax credits, you’ll be able to claim all expenses related to such activities. This also includes wages for employees involved in the process, supplies and expenses for certain contracted services.

Cost Segregation Studies

Cost segregation studies allow property owners to accelerate depreciation deductions, which can help save money on taxes and improve their startup’s cash flow.

Cost segregation works by identifying assets on the property to determine which components are eligible for accelerated depreciation. Common components that can be reclassified accordingly include flooring, windows, HVAC systems, plumbing, electrical and various other external and internal features. Some assets may also qualify for bonus depreciation, which may allow the entire cost of the asset to be deducted in the first year that it’s in service.

A cost segregation study can help minimize tax liability, improve cash flow, and present an opportunity to combine this with other tax planning strategies to further maximize your startup’s overall tax benefits. It also allows for the potential of retroactive and significant tax savings and improved overall financial reporting.

Multi-State Considerations

If you’re selling your product or service across state lines, the various state sales tax obligations you must consider can have a major impact on your startup’s finances and overall growth trajectory. The best way to manage this with your tax planning is to have a good handle on the nexus, or tax obligation, that a business has to a state. Know the physical nexus, economic nexus, and affiliate and click-through nexus. This is best done by conducting a study to know the tax obligations of the states with which you’re doing business.

Other ways to optimize your startup’s tax position in multiple states include assessing your organizational structure, tracking growth and nexus, and conducting regular reviews so that any issues can be caught and addressed proactively. Hiring an in-house finance team or working with a qualified external partner can help your startup manage the complications of selling to multiple states.

Industry-Specific Corporate Tax Planning Considerations

The business model that your startup operates on likely largely depends on the industry in which it operates. Those who have various operational challenges and considerations, for instance, are also likely to have unique tax planning considerations that they need to adhere to.

SaaS and technology startups can benefit from their software development costs and intellectual property assets. Software development costs can be leveraged by identifying areas for cost reductions without sacrificing quality, while IP protection may involve securing patents or copyrights for unique algorithms, processes and other applications. IP can be used as a competitive advantage to help differentiate your SaaS startup’s products and service offerings.

eComm and CPG startups can optimize inventory accounting methods, which can thereby impact the cost of goods sold (COGS). COGS has a direct impact on taxable income. These types of startups must also have a thorough understanding of sales tax nexus. Such startups should also be mindful of their inventory locations, which can create a physical nexus in certain states, which thereby may influence tax obligations.

HealthTech startups have various compliance requirements that can influence tax structure and include fines for non-compliance. Similar to others that operate across state lines, HealthTech startups must also consider sales tax on telehealth and other digital health products.

Common Corporate Tax Planning Mistakes to Avoid

Even with proper planning, tax mistakes can happen. Here’s a look at some of the most common tax planning mistakes that startups make and what you can do to avoid them:

• Filing too early or filing too late: If you file too early, you could do so before receiving all the necessary documents, which could lead to errors. File too late and you’re likely to have to pay penalties and interest on any taxes owed.
• Poor documentation: Documentation is key, so it’s imperative that your startup keeps all receipts, checks and other information to support what it puts on its tax return. Additionally, be sure to keep personal and business expenses separate.
• Misreporting income and deductions: Be sure to report all the income your startup earned and only claim deductions and credits that you know you’re eligible for.
• Lack of compliance: This is most common in HealthTech and other regulated startups, underscoring the importance of knowing rules and regulations.

Tax planning is a year-round task, and it’s OK for your startup to call on some expert assistance. A good financial services partner can help keep your startup’s finances organized and your startup in a good position with its taxes year-round.

Maximize Your Corporate Tax Strategy with Expert Support

If you’re ready to take control of your tax strategy, consider working with an expert financial services partner like Graphite Financial. Part of Graphite’s services include proactive, year-round tax planning to ensure this becomes more than just checking a box, but a competitive advantage for your startup. Contact Graphite today for more information and to schedule a consultation.

FAQs

How does corporate tax planning differ from individual tax planning?

Corporate tax planning focuses on your startup’s total entity tax liabilities, while individual tax planning only involves one person’s total income and finances.

What are the most valuable tax credits available to corporations?

While tax credits can vary depending on the industry in which the business operates, some of the most valuable include Research and Development Tax Credits, Investment Tax Credits, Work Opportunity Tax Credits and Business Energy Investment Tax Credits.

How does entity structure affect corporate tax planning opportunities?

Entity structure impacts tax obligations and planning. Learn the differences in taxation models between S-Corps, C-Corps and LLCs to help determine which structure is best for your startup.

What documentation is required for effective corporate tax planning?

Some of the core financial statements you’ll want to keep on hand include income statements, balance sheets, cash flow statements, shareholder equities, income and sales records, expense documents, payroll records, legal documents and more.

How can corporations plan for multi-state tax obligations?

Each state maintains its own set of regulations for business taxes. It’s important to understand nexus and take a proactive approach to multi-state tax planning to optimize your position and minimize risk.

What are the key tax planning considerations for growing corporations?

A valuable tax planning strategy includes many key considerations like understanding deductions and credits, optimizing your business structure by entity type, strategically timing income and expenses, ensuring accurate record-keeping and staying up to date on any tax law changes.