Taxes are top of mind for just about everyone right now, and many business owners are focused on the size of the annual bill and what that will mean when it comes to cash flow in the near term.
The problem is, there’s not much that can be done about 2024 taxes in 2025. Instead, this is a particularly good time to begin thinking strategically about how your organization will approach tax planning in 2025 and beyond.
What does that mean for your business? And more importantly, how can it affect your business over the long term? We sat down recently with Steve Richards, an Atlanta-based CFO with FocusCFO, to discuss how financial professionals can stop tax fretting and start tax planning strategically to foster long-term growth and build business value over time.
Many businesses begin as so-called lifestyle businesses, designed to provide the owners with enough current cash to live their desired lifestyle right now. However, there comes a point in the lifecycle of many businesses where the owner must choose between maintaining the lifestyle status quo or shifting to a forward-looking focus on value growth, Richards says.
This shift is not always an easy one to make, as it typically requires that owners sacrifice some of the so-called perks of the lifestyle mindset. For instance, many small to midsize business owners use their companies as pass-through entities, running personal expenses through them to lower the reported profit and minimize their tax burden, Richards says. These expenses can include cars or trips – indulgences that provide immediate tax benefits at the expense of the long-term value creation and growth.
As Richards explains, personal expenses route profits away from the business rather than using them to invest in its growth and scale, he said. They also reduce available cash flow, which can limit available financing options. And all of this can lead to a lower overall business valuation, which can become a significant issue when you approach a future exit, Richards says, potentially leaving a lot of money on the table.
On the other hand, when you embrace a growth mindset, you begin to understand the value of playing the long game when it comes to taxes. You also realize the need for strategic tax planning to maximize the after-tax value you will recognize from a future transition or exit.
“You have to change the process. You have to start looking at everything holistically,” Richards says. “You don’t even know what your business is capable of until you maximize your tax strategy.”
Most small to midsize business owners have bookkeepers, controllers, or CPAs to support the financial operations of their companies. And for lifestyle businesses, that may be all you need to accomplish your goals.
However, for value growth businesses, you often need to expand your roster to include a senior-level financial leader who can apply the long-term vision and strategic tax planning you need to achieve optimal growth over the life of your company, Richards says. Senior-level financial leaders are charged with looking toward the future of the business, helping the owner or owners plan for the next three to five years. This process is critical in aligning tax strategy with the overall business goals and in balancing short-term tax efficiency with long-term value creation, Richards says.
A chief financial officer, whether fractional or full-time, will work in partnership with the other members of your finance team – CPAs, controllers, bookkeepers, etc. -- and empower them to think strategically about tax planning, Richards says. This includes encouraging them to research new deductions and credits, as well as relevant tax code provisions with the potential to benefit the business now and in the future.
“The tax laws are changing rapidly,” Richards says. “There are lots of advantages out there, but you have to make it part of your priorities to be strategic about it. If you miss those opportunities, it affects your business.”
In addition, your CFO will operate from the perspective of your long-term financial roadmap and future goals for the business, including a potential future exit, Richards says. Having this person at your side will allow to approach tax decisions from a holistic perspective and ensure your tax strategy falls in line with the bigger picture.
Shifting your approach to tax planning starts at the top.
As the owner of your business, you must communicate the shift in mindset from lifestyle to value growth business to your leadership team. The CFO becomes critical here by educating them on the resulting benefits.
“They help your team understand that more strategic tax decisions ultimately contribute to the positive growth and valuation of the business,” he says. “You’re improving cash flow. You have funds available for expansion, technology, and reinvestment into the company. You even have resources that can help you attract and retain talent. These are all offshoots of the tax strategies that businesses can put in place.”
A strategic approach to taxes is also important when it comes to planning ahead. Say you’ve been advised to change the tax status of the business in anticipation of an eventual exit – moving from an LLC or S Corp to a C Corp, for instance, or vice versa. In changing tax status, the IRS may require a five-year look back to be effective. That means the time to begin preparing is now if you want to take advantage of the change in status sooner rather than later.
As the leader of your business, you have a unique opportunity to foster buy-in and excitement around this critical shift from lifestyle to value growth, Richards says. Use your CFO as your evangelist, and your team will likely jump on board.
You have a powerful opportunity to transform the growth potential of your business by incorporating tax planning into your broader cash flow strategy, Richards says. That process begins with four key steps.
Tax filings come around once a year, but they require a thoughtful and strategic year-round approach to minimize the financial burden and maximize growth potential for the business.
“You don’t have to generate more revenue to have improved cash flow,” Richards says. “Tax strategy is about holding on to more of the money your business has already earned.”
And you don’t have to go it alone. At FocusCFO, we provide fractional CFO services to help small and midsize businesses like yours maximize their growth potential and achieve their long-term goals. Want to learn more about how we can support your business? Contact us today!