A few of the things here at Rohloff Associates that we are consistently asked by our clients is “what do I need to know about taxes?”, or “how can I pay the least amount of tax possible?” and “why do I need a CPA?” All of these are relevant questions that are worth discussion. With the Tax Cut and Jobs Act that was enacted in 2018, these questions are even more important.
One of the top things you should know about your taxes is what your effective tax rate is. Without knowing that, you cannot make informed decisions around if you should purchase a large asset, or invest in retirement, rollover retirement funds, harvest capital losses, or a myriad of other choices. If you have a year with an effective tax rate of 35%, you would want to look into certain options. If you have a year that the effective rate is 10%, you should take a different approach to move income into the current year.
As you are researching different solutions, the term credits and deductions will appear. A credit is a dollar for dollar reduction of tax due. A deduction reduces taxable income. Deductions lower the amount of income used to determine the amount of tax calculated.
Both credits, deductions and your effective tax rate may enable you to lower your tax. The only way this can be accomplished accurately is by having spot on financials. Financials are the foundation for everything: taxes, bank loans, debt covenants, analytics, et al. If you have inaccurate financials, then all other corresponding data could actually be detrimental.
The reason you would want to work with a CPA is make sure you are getting proactive and useful advice. If you are working with a transparent and relational CPA, they can help you navigate tax laws, walk you through making informed decisions and offer strategies and solutions specific to your business. With analytics as a resource, a thorough CPA can track trends to be able to provide value added services.