Texas Home Builder Magazine

Advice to Business Owners

Seek Tax Strategies Early in the Year

By Timothy M. Foster

The vast majority of small and medium-sized construction companies are paying more in taxes than they need to. Few of them take full advantage of a multitude of money- saving (and money-earning) opportunities available through careful tax planning, and many are at risk of losing every business and personal asset they own through litigation – risks that could be eliminated or significantly minimized through tax planning.

Small business owners, in general, don’t spend much time thinking about taxes or their business’s structure. They probably know their company is an LLC (Limited Liability Corporation), an "S" or a "C" corporation, but few understand the tax implications of those entities. That can be a very costly oversight. The opportunities a business has for tax planning are determined – each and every one of them – by how that business is legally structured. For most homebuilders, however, this extremely important decision is often made haphazardly, with little or no thought of the long-term, profoundly serious consequences.

Proactive Tax Planning

Why is tax planning so important? Simply stated, strategic tax planning is a powerful tool that, when used wisely, can:

• Minimize the taxes paid each year
• Provide legal protection for a business, its assets, employees and future from unforeseeable and potentially devastating lawsuits
• Help owners, employees and stakeholders reach their short and long-term financial and retirement goals

Here’s the only catch: Strategic tax planning must be done proactively. The groundwork must be laid and all systems put in place before or during a tax period, not after. This factor, above all else, is the hurdle most small business owners trip over. Procrastination, in this instance, can be harmful to an extent few business owners realize – until it’s too late.

The only time most homebuilders find themselves thinking seriously about taxes is when they see how big a check they need to write. But by then, of course, nothing can be done. Events from the previous tax year can’t be changed, and the new tax year is more than likely a month or two in progress. So, they send in their payments and add another year to a vicious cycle that’s been eating away at their business for years.

When it comes to tax planning, knowledge is power. The landscape of federal and state tax codes and regulations is incredibly complex, and that’s why it’s important to find a competent, knowledgeable tax planning professional. The good news is that within the bewildering compendium of tax laws, there exists a potential business structure that a construction company can use to tremendous advantage.

As might be expected, there is no "one-size-fits-all" tax structure that will work for every business in every situation. Each structure must be tailor-made. Tax planning is a highly specialized field, so it’s unlikely that one’s accountant or attorney will be able to offer this service, although some are qualified.

After selecting a tax professional, the business owner’s job is to think about the business’s future and define some goals. A few of the variables that typically require consideration are:

Business type and total assets. Choosing the best corporate entity depends on the nature of business conducted, the replacement value of assets owned and a comprehensive understanding of the corporate requirements imposed by different tax structures. Getting the details right is essential, especially when it comes to surviving litigation and protecting business and personal assets.

Retirement and benefit package goals. A well-chosen corporate structure can help business owners control the timing, financial stability and lifestyle quality of their retirement.

Number of employees and their financial and long-term goals. Many opportunities exist for business owners who choose to offer their employees (or key employees) tax-preferred compensation, benefits and/or retirement planning opportunities.

Business location. A corporate structure, by carefully aligning state, multistate (if necessary) and federal tax planning opportunities, can greatly assist business owners in achieving their personal and corporate goals.

Level of risk tolerance. Individual owners must decide what the correct level of asset protection is right for them. It’s a personal decision, however, it’s best made with the help of a professional tax planner who can clarify all the options, benefits and complexities.

Optimal Tax Strategy Emerges from Clear Goals

Each business structure comes with unique limitations and opportunities. This is why it’s critically important to first define one’s goals and plans for the business. The goals are then combined with the tax planner’s knowledge of current tax laws, and the entity structure best able to achieve them is put into place.

Business owners can’t walk away at this point, thinking their job is done. With professional guidance, they need to begin exploring the variety of options regarding asset protection, inventory management, income deferral vehicles, maximization of tax credits, deductions and expenses and much more. But don’t worry: this is time very well spent.

Play By the Rules

Tax planning in large corporations takes place each day, on a transaction-by-transaction basis, not just at year’s end. There are excellent business and legal reasons for this. Homebuilders need to do the same. When they respect and follow the corporate formalities of their chosen tax structure, they are more likely to reap the monetary benefits and legal protection provided by them. Basically, this means following some fundamental, time-tested and very sound business practices. Here are a few examples:

• Avoid commingling personal and business assets
• Put detailed and strict business operation controls in placeand enforce them
• Hold regular, formal business meetings (with detailed notes and/or minutes for each)

It means becoming a better business manager, playing by the rules and leading one’s business proactively rather than reactively, bouncing from crisis to crisis. It’s the optimal way to maximize profits, protect one’s family, shareholders and employees and minimize exposure to today’s aggressive, highly litigious society. When is the best time to begin tax planning for next year? Today! Declare war on the procrastination dragon right now, and begin the journey towards a more secure, profitable future.

Timothy Foster is Tax Services Director for International Tax Advisors, Inc., an affiliate of International Profit Associates. Mr. Foster is an attorney and has an MST, Masters in Taxation. IPA and its related companies provide comprehensive business consulting, tax planning and business valuation services to companies in the United States and Canada.