As the year comes to a close, many business owners are starting to call their respective CPA or accountant to start preparing for tax season.
However, Houma native and CPA Ross Valure said tax planning should be an ongoing process throughout the year instead of a last-minute item right before tax season. Tax planning begins moving into more of a damage control situation when it starts towards the end of the year and goes into tax season.
“You don’t want to wait until the last minute to start tax planning because a lot of your options start expiring the closer you get to the end of the year,” he said. “What we could have done in the spring or summer, we will not be able to do now. It just takes time.”
Valure also discussed the purchase of company-owned vehicles for a tax deduction. But he said the IRS no longer allows for the like-kind exchange (1031 exchange) for vehicles, which allowed the seller to defer the tax gains related to trading in a company-owned vehicle for another vehicle. “Now when you trade in your company-owned vehicle you might notice some unintended tax sequences on your next income tax return,” he said. “For this reason, and many others, having company-owned vehicles for the owners of companies may not be the best business model.
It’s a common misconception that someone can spend money to save on taxes, Valure said.
“This time of year, I’m going to get asked the same question: What can I spend money on to save on taxes? I look at them and say ‘nothing,’” he said. “You’re going to spend a dollar to 35 cents. It’s not a dollar-per-dollar match.”
“Now there are a couple small exceptions for individuals, like an HSA account that you can literally put a dollar into, and you get a dollar deduction. You get this deduction, and you get to keep your money,” Valure explained. “Retirement accounts are good, too, because again, you’re not really the spending the money. You’re parting ways with it, but you’re going to get it one day.”
There are many questions people have when starting or running a business, not just regarding taxes, that Valure has come across during his nearly 15 years of accounting — such as when a business should open a line of credit.
“The problem with a line of credit is that you’re just spending someone else’s money at the end of the day; people usually misuse lines of credit,” he said. “They’re usually getting a line of credit to offset their lack of working capital due to the poor performance of their company.”
“I guess a good time to use it is if your company is performing well but for reasons outside of your control, the cash flow just isn’t there,” Valure continued. “A lot of times, especially down here, you have customers that will pay you every 30, 60 or 90 days. If companies are paying you on 30, 60 or 90, you might need a line of credit to draw from to be able to fund your business because it’s hard to go that long without getting money in the door. However, the goal should be to build-up enough cash reserves, so you can reduce or even eliminate your dependency on the line of credit.”
“You don’t want to wait until the last minute to start tax planning because a lot of your options start expiring the closer you get to the end of the year. What we could have done in the spring or summer, we will not be able to do now. It just takes time.”
– Ross Valure
Valure also broke down financing versus cash when it comes to investing in equipment. He said cash is a good option — if a business has a lot of it. He said he witnessed oil field companies go out of business during the recent downturn because they ran out of cash, even though they had assets. Financing is also a good option, so long as the loans have good interest rates and good amortization periods, he said.
A lot of businesses make hiring a CFO a high priority and rush into it, but Valure explained it might not always be the best option. Highly competent CFO’s are not cheap; most small to medium sized businesses don’t have a true need for a fulltime CFO, he said, even though they continue hiring them.
“What many of them really need is more of a part-time CFO, which is what we offer to our clients,” Valure continued. “Once a business surpasses certain benchmarks, hiring a fulltime CFO can make a lot of sense.”
Consulting with a CPA is a priority, even before starting a business, Valure said. “I like to tell people, ‘Before you start a business, talk to a CPA because there’s a lot of planning you can do ahead of time to save yourself time and money.’”
In addition to a CPA, an entrepreneur should also talk to their lawyer, insurance agent and banker before creating their company.
“If you have those people on board and you have a good, solid team,” Valure said, “it’ll be a lot easier.” •