Professional service providers need to apply effective tax strategies in order to meet their financial goals. Despite the high demands of running of a professional service business, it’s important that their providers plan a solid tax strategy.
Here are 8 questions to ask yourself to become a financial success through effective tax planning:
- Are you maximizing your deductions?
When claiming itemized deductions, the Net Operating Loss Carryover may be available to carry over applicable prior period losses. The Net Operating Loss Carryover must be clearly reflected on prior financial statements and income tax returns. It can also be claimed within three years of from the year in which the loss was incurred.
One caveat is that adequate supporting documentation must be gathered and submitted in order to claim this carryover benefit.
- Are you leveraging your tax credits?
Many professional service providers incur advance income tax payments. These are deductible from their annual income taxes. However, they should obtain creditable withholding tax certificates as proof of their advance payments.
In addition, minimum corporate income tax from prior years may be used as credits against prospective income tax due. Similar to the Net Operating Loss Carryover, it can be claimed within the three years in which the income tax was paid.
- Are you effectlvely deducting your charitable contributions?
Charitable contributions made to accredited institutions can be deducted fully. However, in order to claim them, Certificates of Donation may be required.
- What deduction method are you using?
There are two methods of deduction available for deductions. The Optional Standard Deduction (OSD) applies to deductions not in excess of 40% of your gross income. The second method consists in itemizing deductions.
For professional service providers whose costs of sales tend to be lower, they may want to pick the Optional Standard Deduction method. This method uses a higher tax base, resulting in a lower tax amount to pay. Additionally, in cases when the supporting documentation related to these deductions is not available or missing, the Optional Standard Deduction is a better choice.
- Are you properly managing your excess income tax payments?
In situations when excess income tax payments may have been incurred, one of two tax strategies may be available. The first tax option is to carry over the excess credit to the next taxable quarter or year. A second option would be to apply for a tax credit certificate, or get a refund of the excess taxes paid.
The first option to carry over is irrevocable. Furthermore, applying for a tax refund may increase the taxpayer’s risk of being audited.
- Are you giving non-taxable items the proper tax treatment?
Some income items may be non-taxable, such as unrealized foreign gains exchange. These items must be given the proper tax accounting treatment.
- Are your transactions covered under tax treaties?
Some professional service providers may enter into transactions covered by a tax treaty. In this case, they may benefit from a tax exemption or preferential tax treatment. However, such situations have to fall under the Tax Treaty Relief Application.
- Do you have any unappropriated retained earnings?
Unappropriated retained earnings may incur a tax penalty of 10% if they exceed paid-up capital. The appropriate tax strategy will take this into account when planning for the best tax options.
Are you looking to implement tax planning strategies for professional service providers? Contact us for a free consultation at (561) 501-380.
The Balance Sheet is a bookkeeping and accounting services firm located in West Pam Beach, Florida. It was created by Maxine Taylor out of a need to help her clients make better projections and financial decisions for their business.
“Tax planning strategies.” BusinessWorld. Accessed August 26, 2017. http://www.bworldonline.com/content.php?section=Economy&title=tax-planning-strategies&id= 127590.
Hananel, Eric. “Tax Planning Strategies for Individuals in 2017.” Investopedia. January 10, 2017. Accessed August 26, 2017. http://www.investopedia.com/articles/taxes/011017/top-tax-planning-strategies-2017.asp.
PricewaterhouseCoopers. “Personal financial services.” PwC. Accessed August 26, 2017. https://www.pwc.com/us/en/private-company-services/personal-financial-services.html.