Tax planning basics for landscaping companies 

by Edward Morrow 

Understanding Taxes 

One of the least understood and feared areas of business may in fact be taxes. With the explosion of social media posts that profess that you can write-off this and that and this — seldomly providing sources of documentation — you’re left wondering, “Who can I trust?” This article explores the world of taxes, helping your company learn how to make sense of the madness.  

We will explore the essence of business taxation; how to research and locate tax law via books and online resources; common deductions and write-offs, and how legal entities fit into your tax planning process. As always, consult with the applicable legal and financial professionals to assist you with your current situation and future business goals. Let this article be a guide to help you on your journey.  

Tax Research 

Find documentation and study reputable sources. The Internal Revenue Code is massive. But with a little patience and love for reading, you can educate yourself on basic principles. The complete IRC can be found online. And is, again, a lot. You can trim this information by running over to www.irs.gov. With the handy search field, you can zero-in and focus on specific areas of the tax code without being overwhelmed with information and tax regulations that may not apply to your particular business situation. There are many tax books on the market; the ones that serve their readers the best list IRC citations and reference IRS publication numbers. Remember you don’t have to know specific lines of the tax code, but you should know where to get the information.   

Common Deductions 

Deductions can come in all shapes and forms. Due to the nature of landscaping and services requiring mechanized production, depreciation is a major deduction that you don’t want to slip through your fingers. We can look over to IRS Publication 946 for insights into depreciation, the systematic recapture of purchasing high-dollar items that you intend or expect to use for more than one year. Full-year expensing by using the section 179 deduction may be advantageous—or not, again depending on your current profit, or future projections.  

Tracking mileage and travel expenses accurately is key to not only covering overhead costs from a bidding perspective, but also for tracking costs to lower taxable income. Establishing an accountable plan is a step in the right direction because business owners may pay for business expenses with personal money. An accountable plan is simply a reimbursement policy that a company sets up to capture business expenses that were paid out of pocket. Converting eligible personal expenses (the portion that have a business connection) is another strategy and involves delicate tracking and reporting. Remember, the better the tax deduction, the more you have to work for it. This can involve using a personal vehicle for business purposes which is outlined in IRS Publication 463: Travel, Gift, and Car Expenses. 

Legal Entities 

Corporate entity selection provides legal and tax advantages, and why it’s important to coordinate the efforts and expertise of a trusted accountant and attorney to help you design the right entity for your goals. LLCs, S-Corporations, and C-Corporations will only be discussed in this article. 

Limited Liability Companies are typically simple to form, and can be elected to be taxed as disregarded entities, partnerships (if multi-membered), S-Corps, or C-Corps. This flexibility can make it a popular choice.  

As income and profit grow, it may be time for an entity conversion, let’s say that the entity is converted into an S-Corp, which means they must now be classified as an employee and be compensated with a “reasonable” salary. As an S-Crop, self-employment taxes are now nullified, which can present tax saving opportunities for the company and taxpayer. S-Corps are still considered pass-through entities, so leftover profit will still flow to the company owner, or respective owners.  

Let’s entertain the idea that the business grows; converting it into a C-Corp is an option. C-Corps exhibit the ability to retain profits in the business, which is attributed to the fact that it is truly a separate entity from the owner. Double taxation, the payment of dividends, could be a disadvantage.     

Action Steps  

Look at tax planning as a year-round exercise, like staying fit consistently instead of intermittently “working out.” Or eating healthy just once a year—which is just like seeing your accountant/tax preparer once for April tax filings. Make sure you prepare financials monthly and on-time to give you the data to prepare for taxes and lower your taxable income. Remember, there is nothing wrong with lowering your tax burden by utilizing the rules already set within the tax code. It is as simple as re-investing money and profit into your business to lower your bill. In other words, if you have a profit, either you get taxed on that amount—or you use that profit to invest in your business through marketing, staff development, training, bonuses, equipment, tools, etc. to lower your taxable income, thus your tax bill. Hopefully, this article has helped you change your view on taxes and how you can use the Internal Revenue Code to empower your business and investment endeavors.     

Edward Morrow is an ISA-certified arborist and author. He draws on his accounting background to help industry professionals understand business and serves as a Tree Care Industry Association speaker.