Tax Planning 2020: What It Is and Why You Need It
Whether your pharmacy business is just getting started or if you expect to take a business loss in 2020, proactive tax planning can save you significantly this year or the next. By looking at your financial statements, your P&Ls, estimated tax payments and other data, tax advisors who focus on pharmacies can help you manage your tax obligations.
In this video, Scotty Sykes, CPA, CFP® and Kendell Harris, CPA discuss the value of tax planning for pharmacies, especially this year with so many variables to federal and state tax codes. In this short discussion, they lay out proactive steps you can still take for this tax year to improve your tax situation going forward…and sustain cash flow.
Sykes & Company, P.A. consults with pharmacies nationwide on tax planning. See our related video on cash vs. accrual accounting for business and tax purposes.
If you prefer to read this content, the video transcript is below.
Do pharmacists need tax planning?
Kendell: Well, the answer to that question is yes. Basically, everyone needs tax planning. Recently the IRS encouraged everyone to have a tax plan. A lot of people might not realize it, but at the beginning of the year when you get a new job and you fill out a W4, in essence, you’re tax planning from then, figuring out how much there’s gonna be withheld, or how much you decide not to withhold. Either way, that’s gonna impact the amount that’s due come April of the following year. So that in essence is a tax plan very simplified. And especially if you have businesses, or new dependents, or investments, or you sell something, all of that needs to be taken into consideration with the amount that you’ve paid into the government, and if you feel comfortable paying the tax or if you look forward to having a refund. So everybody needs a tax plan.
What is tax planning?
Scotty: You wanna be proactive with tax planning. You don’t want to be reactive. So we hear a lot of pharmacy owners out there say they get the call on April 15th from their CPAs and say, oh, by the way, you owe $100,000 tomorrow to the IRS, to the Treasury, and you need to write that check today. So, you know, tax planning is not that. Tax planning is looking ahead, being proactive, making projections, putting strategies in place, and adjusting as necessary to the different changes, the different variables, that arise throughout the year, and then putting that plan into action. And so come April 15th, you know you’re in a refund situation, you know what your tax liability may be if that’s what you’re planning for, planning around, et cetera. So that is really what tax planning is, just being proactive and planning ahead.
What is tax planning important in 2020?
Kendell: 2020 has been a big year in so many different things. We have the different HHS payments that were made in 2020, you have the different government funding to support the employees with the Paycheck Protection Plan, and all of these things, some of them have not even been solidified with the IRS. How is it going to be treated for tax purposes? So for right now, it’s so important, before the year’s over with to get an idea of what are the taxable items, how they will be treated, and then even if you might think I just have a loss, you have to know are you able to take those losses in the current year? So it’s going to be a year like no other to really analyze what your situation is like considering all the variables and changes of 2020.
Scotty: So in addition to what Kendell just mentioned, you know, I think cash flow is really a big, big driver as well, and, you know, with cash as tight as it is in pharmacy and we all know cash is king in a pharmacy, you know, if you’re tax planning and you’re doing the right things from that perspective, being proactive there, you’re really planning for that cash flow, and that’s extremely important in a pharmacy. And so that reason alone is a big motivation to get out there and start planning for some taxes.
Kendell: And I would be remiss if I didn’t add about the Tax Cuts and Jobs Act has allowed small businesses to make the adjustment from accrual to cash, and that has caused significant tax savings with pharmacies that we work with. However, that’s not an adjustment that will necessarily benefit every pharmacy in the current year, so make sure that whoever your accountant is is aware of that adjustment from accrual to cash, and is able to look at things such as your basis, your profit, your receivables, your payables…those things are up to date to be able to estimate how big of an adjustment and how big of a tax advantage you will get from that.
When should I start planning and what is needed?
Kendell: The first thing we’re going to ask for is up-to-date financial statements. So if your financial statements aren’t there, or they’re inaccurate, there’s a lot of adjustments that haven’t been made since the last year, it’s really impossible to tell or to plan for anything. And as we’re monitoring your income throughout the whole year for our clients, towards the engagement starts around October to November where we hash out the finer details, see if they need to purchase additional equipment, or discuss different retirement strategies to prepare themselves for retirement depending on their age, how much they want to put in. So the engagement in the fine-tooth details is usually around October, November. But it’s something that we’re monitoring year-round.
Any final tax planning tips?
Scotty: Well I can tell you that just because maybe you own one pharmacy, maybe you’re not as profitable as you think, and you may not need tax planning, tax planning is still very important for everybody, because 10, 20, $30,000-dollar strategy sessions with these tax plans can save you a good chunk of money come April 15th, even if you’re running losses, even if you’re profitable by a small degree. So, you know, there’s a lot you can do, no matter what size income or losses you’re faced with, you can do some extra planning there to maybe get some refunds back, to offset taxes you’ve been withholding through your W2 or something like that.
So, you know, retirement plan strategies, basis strategies to absorb losses or offset other income, you know, you’ve got qualified business income strategies, payroll strategies with how much you’re paying yourself and how you maybe plan around that with the qualified business income, so there’s just a whole myriad of options out there, but it really is for everybody. Don’t think just because you may be not in a very profitable situation or in a loss situation, that it really doesn’t apply to you. You can maximize your situations in a lot of those cases, with the proper planning.