It’s the fourth quarter of the calendar year. If a business ends its fiscal year on December 31, much time has passed since the year began. The results should be looking clear. They could be good, or great—or not so hot. Not that much can be done to change course, with three quarters closed. (Some companies select other dates as a year-end but this is also applicable to any business well into their fiscal year, as most are).
Most businesses could add $40,000 to the bottom line easily – it just requires some advance tax planning and basic restructuring concerning compensation. The mechanisms are there—such as paying dividends to shareholders for income rather than elevated high-tax salaries. These changes — and others — can be adopted without delay.
Business owners hope (and pray) that the first three quarters progress positively, and that tax payments for the year match the eventual results, as required. Whether or not December 31 is the year-end, there is an annual nail-biting moment until the accountants calculate the yearly results and present annual statements. It’s a ritual each year – for most businesses – but if you want to succeed, it’s absolutely not the way it should be.
The fiscal year is basically over now. Congratulate yourself or take stock of what went wrong. Today, however, is the time to seriously consider improving next year’s results—without delay.
As the go-to firm for ‘dynamic entrepreneurs,’ we insist that business owners seeking to become clients agree to meet with us each quarter. This allows decision-making in real time, when something can be done about altering the course of action.
In most relationships with CA firms, the accountant shows up with the year-end results and the business owner hopes that he can meet his obligations to the Canada Revenue Agency. That’s the nail-biting period we help our entrepreneur clients avoid.
There are a host of advantages to thinking in ‘real time’ about business structure and its tax implications. My Top Ten List is below.
- Compensation—not too little, in general ‘too much.’
- Taking advantage of income splitting.
- Using the $500,000 small business deduction (for a Canadian controlled private corporation resident in Ontario).
- Paying dividends rather than compensation to shareholders (who could be family members)
- Overpaying (or underpaying) tax; both affect results.
- Avoiding the mistaken belief that ‘bonusing down’ to $500k in taxable income is an effective strategy at a time when ‘high rate’ corporate taxes have been reduced (to 25 per cent in 2014).
- Multiplying the lifetime capital gains deduction on the sale of the business.
- Committing to growth and examining the financing that will get the business there.
- How the revenue stream is being earned; how receivables are structured and the function of shortening collections.
- Looking at balance sheet in relation to income statement—and how the two are connected and integrated.
A great deal can be done to influence the bottom line next year. But it has to be done now, not next year—or at the end of the next fiscal year.
Mitch Silverstein, CA, is a senior partner at SBLR LLP Chartered Accountants, a Toronto-based accounting and consulting firm specializing in privately-held companies. With over 20 years of experience, Mitch provides high-impact strategic tax planning, business advisory and traditional accounting services to small and mid-sized business owners across all industries.