Planning for Taxes in Forecasts


Welcome to this week’s final segment in the planning and forecasting series of all of metrics all business must monitor. Head over to our Youtube channel and take a look at these articles from The Balance and Fundera to learn more.

This week, we’re going to talk about tax burden, because this has to be in your modeling process. Every business has a tax burden. Every person or organization pays taxes at some level, and so you need to do your financial forecasting down at this kind of level. Everybody knows about income tax, whether it’s corporate tax or pass through individual income taxes, we all know about that. If you’re a sole proprietor, you’ve got the self-employment tax, which is your placement for social security and medicare. But there are many other taxes, and they heavily depend upon your local area.

Let’s start from the bottom up. Your local area, in some states, may have an income tax, may have a payroll tax, etc. In Tennessee, we have what’s called business tax, which is basically a gross receipts tax. That tax is duplicated in many other states and cities all around the country. You’re also going to have personal property tax, as well as real estate property tax.

As you move on up to the state level, you’ll usually have state level corporate taxes, but those can vary. Maybe you’re in the transportation business, or you consume a lot of fuel, so you’re going to have fuel tax. With a lot of these taxes there are corresponding credits, so you can have fuel tax and fuel tax credit. If you’re in the food and beverage business, then you know about alcohol tax. All of these things have to be estimated.

Moving on up into the the federal level, there are, of course, income taxes, which are highly complex, and your model needs to pick up not every single little detail, but it needs to be flexible enough that as your business changes, maybe your income tax is particularly dependent upon one one line of your business, so your income tax needs to be flexible to that in your modeling.

If this sounds very boring, it can be tedious, but it’s critically important. We want to stress again the need for constant forecasting and modeling of your business, on at least a quarterly basis, but more likely a monthly basis. If your business is of any size at all, and varies a lot, which everything seems to do these days, as a part of closing your monthly financials you also then want to update your forecast. Look at any of the historical trends and see if that changes any of your assumptions going forward.

There’s a lot of work in building the model, but usually the model will stay with you for a long time and you can tweak it along the way. If we can help you with planning and forecasting and modeling for your business, that’s what we’re here for! Set up a call, and let’s get started.

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