Tax Time Considerations

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This article was first published on Beef Central on 8th May 2017

In times of good profits, investments in the business to improve future performance and reduce risk should be considered. The tax deductibility of the investment however should be secondary to whether it is a good investment in its own right. A cost benefit analysis should be undertaken to compare what the investments return, in total and relative to the amount invested and over what time frame.

If the investment doesn’t stack up then reducing debt or provisioning for succession or retirement will be a better use of funds, regardless of the tax implications.

You can buy a load of fencing gear and fill the bowsers up, but often this just means that once you do it, you have to keep doing it every year to maintain the benefit. Tax-averaging can also reduce this year’s bill, but will result in a higher tax bill than you would have had otherwise in the leaner years, so you may be better off paying it now while the cash is there.

It is essential to work with good accountants, ones that can advise you on effective and legal strategies and structures to manage tax year to year, whilst maintaining focus on the main game, which is increasing after tax profits in the long term. It is important that you make sure your accountant clearly understands that this is your focus, many will find this a refreshing change from a focus on reducing this year’s tax bill only.

In summary;

  • No business has ever gone broke paying tax per se, but debt and low profitability has sent a lot to the wall.
  • Focus on maximising after tax profits in the long term, not reducing tax in the short term.
  • Work with good accountants and advisors that will advise you on effective strategies to build wealth in the long term
  • Most of the profits over ten years are made in three years, don’t squander them. They need to be used to strengthen the business to achieve its long-term objectives
  • Any reinvestment in the business should be based on a rational assessment of its return in improved performance and/or reduced business risk, rather than its tax deductibility

Build your financial literacy, so you can understand and improve business performance, rationally allocate capital and have informed, productive discussions with your accountant.

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