Avoiding Business Tax Debt

July 17, 2019

When it comes to money management, corporations are in many ways very similar to individuals. Businesses often struggle when it comes to managing their finances and paying their debts and other obligations. Corporations often take loans which later become difficult to pay back. Corporations are subject to the corporate tax rate, and very often they accumulate business tax debt due to poor planning.

Bankruptcy is commonly associated with individuals, but it’s important to remember that corporations declare bankruptcy too. And when corporations declare bankruptcy, very often the liabilities are much higher. When Enron declared bankruptcy, for instance, the company walked away from millions and millions of dollars of its financial obligations. In short, financial management is vitally important for all businesses, including those which consistently bring in good revenue.  

In this post, we will discuss several strategies to use to avoid accumulating business tax debt. Avoiding tax debt is one aspect of the more general aim of proper financial management. As we know so well at the law firm, business tax debt is one form of debt which can cause particularly harsh troubles for businesses. That’s because business tax debt can lead to tax liens, credit issues and other financial maladies. Though such debt can be resolved, the best strategy is always to prevent it from building up. Let’s look at a few strategies for preventing tax debt. 

Hire a Qualified Tax Accountant 

One of the best ways a corporation can avoid accumulating back tax debt is by hiring a qualified tax accountant. A talented accountant can not only ensure that your taxes are filed, an accountant can also ensure that you take advantage of all possible tax benefits. When available, corporations can take deductions, credits and other tax perks. A skilled accountant will have a detailed knowledge of business tax provisions and be able to optimize your corporate tax return. In other words, a tax accountant can assist you in minimizing your tax burden. And that is a big step toward preventing an accumulation of this type of debt.  

A skilled tax accountant will also be able to save you money in various ways. Suppose your corporation needs to perform a Sec. 1031 like kind exchange. A tax accountant will be able to help you select a qualified intermediary and also help you understand the tax implications. Suppose your corporation wants to acquire another entity. A tax accountant can help you navigate the potential business tax consequences of the acquisition. Among all the preventative steps you might take, acquiring a skilled tax accountant is perhaps the most critical.  

Cut Out Unnecessary Expenses 

Another strategy to avoid tax debt is to cut out unnecessary expenses. Very often, businesses spend money on things which aren’t necessary for either business growth or maintenance. This is very common for businesses that first begin to bring in steady income. In many cases, companies bringing in good income tend to make unnecessary purchases as a way of trumpeting their success. For instance, some might spend money on lavish holiday parties, company limos or expensive office perks. The problem with this practice is that these expenses use funds which could otherwise address other liabilities.

Very often, corporations which accumulate business tax debt do so even when they have the means to avoid such debt through better financial management. Cutting out frivolous or unnecessary expenses is one part of sound financial management. This doesn’t mean that successful corporations can’t ever spend money on office perks or other kinds of bonuses. But it does mean that this type of practice should only be done after a very thorough financial analysis. And that analysis should include projections about future income.  

Enron is a good example of a corporation which threw large sums of money away on unnecessary expenses. Records show that managers would charge $500 lunches on corporate credit cards; executives received huge bonuses for retention purposes, and so forth. These things ultimately contributed to the company’s downfall. Tightening up on unnecessary purchases may make things a bit more dull for a corporation, but a little dullness certainly beats long-term business tax debt. 

Maintain Sufficient Cash Reserves 

This next strategy goes along naturally with cutting out unnecessary expenses. Another way corporations can avoid back tax debt is to always maintain a certain amount of cash reserves on hand. This may seem easy, but we all know how difficult it can be to keep cash for long periods of time. Yet this strategy has been famously used by Microsoft. As he was growing his company, Bill Gates would hold enough cash to keep his business running for a certain period even without any revenue. This helped him avoid running into problems with debt.

Maintaining enough cash reserves will also ensure that your corporation will be able to handle unexpected tax obligations. As we know, tax law changes, including the rate at which corporations pay taxes on their income. So it’s possible that your business may eventually face an even stiffer tax burden in the future. Storing cash will allow you to transition to new tax rates more comfortably. If you need to spend some of reserves, be sure to replace what you spend as soon as possible. Preparation is one key in the fight against back tax debt, and having cash reserves are a big part of that preparation. 

Business Tax Help is Here!

Here at Mackay, Caswell & Callahan, P.C., we are intimately familiar with the issue of back tax debt. We’ve helped dozens and dozens of businesses and individuals resolve their back tax debt with the IRS. We know from first-hand experience how difficult this process can be. When businesses get in trouble with back taxes, selecting a qualified tax attorney is a big step toward resolving the problem. If your business is struggling with tax debt, give one of our top New York City tax attorneys a call. We’ll give you the immediate help you need. 

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