In a business’s early stages, tax strategy typically takes a backseat to growth. There tend to be relatively few opportunities for major tax plays, and compliance is often enough to satisfy founders.
However, as businesses scale, their tax obligations grow more complex, and decisions start to carry larger tax implications. By the time they reach millions of dollars in revenue, leaders often need more support than tax preparation services can provide.
In this guide, we’ll explain why corporate tax advisory is so important for growing businesses and how it differs from basic compliance. We’ll also discuss when you should hire more strategic support, as well as what type of experts to consider.
Tax Preparation vs. Tax Planning
Tax preparation refers to the filing of your tax returns in compliance with regulations. It primarily involves reporting all of your business’s income, maintaining any necessary supporting documentation, and submitting all required forms on time.
In other words, the goal of the practice is essentially to avoid incurring penalties from federal, state and local regulators.
Corporate tax planning goes several steps further. It involves developing a more sophisticated strategy designed to minimize your long-term tax burden. Not just in the current year, but across the life of your business.
In addition to considering the tax implications of decisions before making them, this means taking steps proactively to capitalize on potential tax savings opportunities.
For example, you might create a separate S corporation for a new arm of your company, or file extra paperwork to claim the research and development (R&D) tax credit for expenses you incurred to take advantage of the benefit.
Why Tax Needs Change as Companies Scale
As businesses scale, their tax support systems often become increasingly insufficient for their evolving needs. Here are some of the primary structural shifts that make having a dedicated corporate tax strategy more valuable over time.
Business Decisions Carry Greater Tax Implications
Because many business taxes are calculated as a percentage of net profits, a company’s tax liability usually grows alongside its earnings. As a result, taxes tend to become a much more significant expense as a business scales.
For example, C corporations are subject to a flat 21% income tax at the entity level. One that earns $500,000 in taxable net profits can expect to owe $105,000 in corporate income taxes that year.
However, by the time that same corporation’s taxable earnings reach $5 million, its tax bill will have grown to $1.05 million. At this size, any decision that shifts profits even 1% could change the company’s annual tax liability by more than $10,000.
When the stakes are that high, businesses can usually no longer afford to ignore the tax effects of day-to-day decisions. Instead of managing taxes reactively just before filing deadlines, year-round planning becomes essential.
The compliance-oriented approach that may have worked for a smaller version of the business will simply result in leaving too much money on the table.
Geographic Expansion Triggers New Tax Obligations
Modern businesses often expand across state lines as their operations grow. Even if you don’t open any new storefronts, that can be as simple as hiring a remote employee or surpassing a certain number of customers in another part of the U.S.
For example, since the 2018 Supreme Court decision in South Dakota v. Wayfair, Inc., you can trigger sales tax requirements in other states without having a physical presence there if you meet the criteria for “economic nexus.”
Quick Tip: The most common benchmark for economic nexus under state sales tax laws is $100,000 in sales annually.
You can incur income or payroll tax requirements just as easily, and because the thresholds for each vary by state, simply determining when this has occurred is often a time-consuming task for rapidly growing companies.
Once you become subject to a new state’s requirements, the burden only increases. For example, sales tax departments require you to register, collect and remit specific tax amounts, and file recurring sales tax returns—in some cases, as often as monthly.
Managing these types of responsibilities across multiple states and tax types can quickly become overwhelming, especially when they influence each other, further complicating matters.
This is another reason that reactionary, compliance-focused tax processes become risky as you scale. Businesses increasingly need proactive, holistic tax support that can anticipate obligations before they emerge and navigate them all in combination.
Increased Complexity Opens Tax Savings Opportunities
In addition to triggering new tax obligations, business growth can create opportunities for major tax savings. These often emerge around critical growth points, such as mergers and acquisitions (M&A) transactions or fundraising rounds.
For example, when negotiating an exit, you may be able to reduce your tax burden substantially by structuring the deal as a stock sale. Or, failing that, by utilizing the Qualified Small Business Stock (QSBS) exclusion to minimize your taxable gains.
Growing businesses can also become eligible for tax incentives they couldn’t claim previously. For instance, if you’ve started investing in internal software or new product development, you may be able to claim the R&D tax credit, which can reduce your federal income tax liability dollar-for-dollar.
Similarly, businesses with multiple legal entities can use transfer pricing strategies to affect the allocation of income and expenses between them. When these entities operate in different tax jurisdictions, this can influence the business’s overall tax burden.
Navigating these complex opportunities requires a deep understanding of both the business and relevant tax regulations. Basic tax preparation services typically won’t be able to help you take advantage of them.
When to Hire a Tax Advisor
Generally, you should think about hiring a tax advisor when your tax needs evolve beyond simple compliance. This often happens gradually as your business scales, but here are some common signs that it’s time to consider more strategic support:
- Substantial tax liabilities: Your business has grown large enough that taxes have become a significant expense in absolute terms, making it too expensive to ignore the tax implications of day-to-day decisions.
- Multi-state tax obligations: By hiring remote employees, reaching nexus thresholds, or otherwise expanding into other parts of the country, you’re subject to tax requirements in multiple other states.
- Complex transactions: You expect to face major financial hurdles in the near future that will have heavy or sophisticated tax consequences, such as M&A transactions, equity fundraising rounds or large capital investments.
- Potential tax savings: You’ve identified opportunities that could significantly reduce your tax bill, but you don’t know how to take advantage of them, especially without compromising other aspects of your financial plans.
The right advisor should help you develop a strategy that balances your desire for tax avoidance with your audit risk tolerance. Remember, pursuing more aggressive tactics can reduce your liability, but there’s often also a greater chance you’ll be subject to scrutiny from tax authorities.
Corporate Tax Advisor vs. CPA
A Certified Public Accountant (CPA) is an accounting professional who has gone through a rigorous licensing process with their state’s board of accountancy. Typically, the licensing process includes:
- Obtaining a bachelor’s degree and 150 college credit hours
- Working full-time under an active CPA for one or two years
- Passing a series of accounting exams within a rolling window
As a result, you can generally be confident that a tax professional with a CPA license has a baseline level of accounting education and experience.
However, being a CPA does not mean that a professional is capable of serving as a corporate tax advisor. For example, many CPAs specialize in basic tax preparation, individual taxes, or audit and advisory services instead.
While a corporate tax advisor may be a CPA, it’s much more important that they know how to help business leaders understand the tax implications of their decisions and refine their financial strategies accordingly.
Get Expert Corporate Tax Advisory Through Paro
As your business grows in size and complexity, the tax consequences of financial decisions can increase significantly. Beyond a certain scale, corporate tax strategy becomes an essential aspect of sound financial planning.
If your company is growing rapidly, consider whether your current level of tax support is enough for your evolving needs. If not, Paro’s corporate tax advisory services can help you go beyond compliance and implement an intelligent, forward-looking tax strategy.
FAQs
Business tax preparation involves filing your company’s tax returns in compliance with regulations to avoid penalties. Tax advisory goes beyond compliance, creating a strategy designed to minimize your company’s total tax burden over its lifespan.
Tax filing errors can result in various penalties, often depending on the severity of the mistake. For example, understating your income tax liability by 10% or more can trigger an accuracy penalty equal to 20% of your underpayment. Meanwhile, failing to file your return by the due date typically results in a late filing penalty worth 5% of your tax due.
A business should typically hire a tax advisor when it needs tax support beyond basic tax preparation and compliance. Some common indicators are operating through several legal entities, having tax obligations in multiple states, and seeing tax savings opportunities that you don’t know how to capitalize on.
