The cyclical pattern of business is just that, cyclical. Booms and busts, highs and lows, expansions and recessions, good times and bad times, or more simply put, you’re either making money or you’re not.
When your business is enduring one of the low points of the cycle, taxes are not often top of mind. Generally speaking, when you’re not making money, you typically don’t have to worry about paying a lot in taxes.
However, when the pendulum starts to shift and the red starts to turn black, it’s critical that you project, plan, and prepare for the less ominous of life’s two certainties, those dreaded taxes.
Project: Cash flow and income tax projections are an important exercise and should be part of your business review process as a McDonald’s Owner/Operator, at least once a year. This is a great opportunity to take a step back and survey your most recent operational results, observe the prevailing economic winds that will affect your business in the near future, and project where your business will go in the next 1-3 year period.
Any projections that extend out greater than three years should not be given too much weight in present decision making, primarily because the range of possible outcomes just becomes too large and unreliable. No one knows your business better than you do; however, projections can sometimes be tricky as there are many varied items to consider. It’s always a good idea to consult your trusted CPA advisor at this stage in the game, when the critical calculations are being done.
Plan: Once you’ve finished putting together projections for your McDonald’s business, it’s time to survey the landscape and figure out what those projections mean for you in terms of cash flows and potential tax liabilities.
With the passage of the PATH Act last December, there is finally a moderate amount of certainty with regards to the Work Opportunity Tax Credit and Accelerated Depreciation rules (both of which were extended through 2019). So, depending on the short or long term result of your projections, you may consider fast tracking a major reinvestment project in order to take advantage of more favorable depreciation rules or postponing a project for similar reasons.
The important thing to keep in mind here is with both Bonus Depreciation and increased Section 179 Depreciation in force for the near term, capital reinvestment in your business has the ability to substantially offset the increased cash flow and help minimize your taxable income, thereby reducing your tax bill.
Again, consulting with a trusted CPA advisor at this stage is vital. Navigating the labyrinth which is our tax code is not something you want to go at alone!
Prepare: The final step in this all important process is the preparation. You’ve projected where you think your McDonald’s business will go and planned for ways to help minimize the annual tax bite.
Now comes the time to prepare, so when the tax bill is due, you’re ready for it. There are many different approaches to saving for taxes, just like there are many different flavors of ice cream; the strategy you may choose is ultimately personal preference.
One possible strategy is to set aside an equal amount each month, based on the total projected tax you will need to pay. Then when the time comes to make the payment, you can ensure that you cover the minimum amount due for the estimated tax safe harbor. (I’ll have more advice on the topic of the safe harbor in an upcoming article).
If you happen to suffer from the occasional bout of insomnia, like I do, you will probably remember seeing advertisements for the Ronco cooking ovens during those late night infomercial marathons. The “set it, and forget it” mantra, made famous by the great Ron Popeil, can be just as appropriate for tax planning as it is for cooking chicken.
Once you determine the amount of money you will need to cover safe harbor payments or your entire projected tax bill, you can set up monthly transfers to a tax savings account in incremental amounts that will get you to your goal. At a minimum, this strategy will guarantee that you will not be subjected to underpayment penalties and interest if your overall tax liability is not covered by any estimated tax payments you make during the year.
At some point, everyone has to pay Uncle Sam. Unfortunately, in an ever more volatile business environment, the swing between having to pay no tax and lots of tax can occur in a single year. In order to make sure you are ready for whatever the future brings, you’ll want to remember the three P's: Project, Plan, and Prepare!