Q: As a small-business owner, are there steps I can take now to build a good foundation for responding to any tax reform changes?
A: 'Twas the night before tax reform, and all through the nation …. While it is fun to dress tax reform in this seasonal jingle, the uncertainty we jest about is real for small business owners.
Small business owners are successful because of their entrepreneurial spirit and orientation toward action. With year-end approaching, now is a good time to take foundational actions, which can position your small business for the new tax rules.
For example, reviewing year-end financial reports and customer outlooks will provide you with new insights for forecasting the future. This projection is what your CPA and financial adviser will want to know when they are helping you wade through the myriad opportunities presented by new rules. Should you change your entity type to align with new lower corporate tax rates? Does it make sense to be an S-Corp, an LLC or a sole proprietor? Should you continue to accelerate deductions and defer income? These are some of the questions you can answer once you have a firm grasp of your multiyear financial outlook.
Now is also a good time to ensure compliance with your tax obligations. Payments to employees, contractors and vendors all come with tax reporting requirements, as do collections of sales tax from customers. Separating personal financial matters from the accounting for your small business is always important. Staying on top of your tax compliance obligations will give you and your advisers confidence that your tax foundation is solid and that you are ready to tackle complex new planning.
One final foundational action is to know your endgame. Do you have a succession plan? Do you plan to build value and then sell your business? The answers to these questions will influence the tax planning actions you take.
Getting your small business finances in order now with good forecasting, tax compliance and endgame strategy will position you for an effective response to any new tax rules.
Tim Radermacher is a clinical faculty member in the accounting department at the University of St. Thomas Opus College of Business.