Failure to comply with federal and state tax regulations can lead to hefty fines, audits, and a whole lot of pain for you and your company. Thankfully, you can avoid that pain with these seven proactive ways a fractional CFO minimizes tax risk.
The tax landscape needn’t be a treacherous minefield. With the right knowledge and support, you can mitigate risks while keeping your money where it belongs—in your business!
First things first, let’s look at the tax risks companies face when they’ve reached a few million in revenue.
- Inaccurate reporting. Mistakes in reporting are easily avoidable yet often present. It can lead to hefty penalties and trigger the dreaded audit.
- Evolving regulations. Tax laws constantly change, so staying compliant feels like aiming at a moving target.
- An unclear tax strategy. You don’t want to be scrambling at the end of the year to handle your tax liabilities, but with the proper support, you don’t have to.
Don’t let inaccurate filing, missed deadlines, or a lack of knowledge hurt your business and employees. Ignorance isn’t bliss when it comes to taxes, so you want to take steps to minimize your tax risk.
Keep reading to learn how a fractional CFO can help you avoid trouble with business taxes.
#1: Accurate Reporting
Inaccurate reporting is the bane of many startups and often stems from a lack of effective systems, financial expertise, or simply the chaos of rapid growth. When your books are a mess, errors are inevitable.
Accurate reporting isn’t a luxury; it’s a must, and a fractional CFO can take care of it for you. To tackle these issues head-on, you’ll want to take the steps below.
- Invest in reliable and powerful accounting software. It should automate financial processes to improve accuracy and streamline reporting, ensuring every transaction speaks the truth.
- Conduct regular health check-ups for your finances. If you can catch discrepancies quickly, you’ll save yourself a lot of pain down the road.
- Lean on a fractional CFO. Even if you can’t bring on a full-time CFO yet, that doesn’t mean you can’t receive the same kind of financial support.
Founders, you need to proactively support these kinds of financial initiatives to keep growing your business. Inaccurate reporting is a serious risk that can derail the progress you’ve made. Financial reporting isn’t just about crunching numbers and managing tax liability. It’s about understanding and creating a compelling financial narrative that drives the business forward.
#2: Understanding Tax Obligations
Tax laws can be confusing, especially as the complexity of your company increases as you scale. Whether you have the financial expertise or not to stay on top of state-specific tax requirements, international tax obligations, or industry-specific regulations, it’s a lot to keep up with.
The government doesn’t give much grace if you ignore or misinterpret tax laws, and those hefty penalties can cause your organization a lot of problems. A fractional CFO can help you understand the rules and how to apply them to your unique business situation.
A fractional CFO brings the expertise you need to stay informed about the latest tax laws and regulations, and they can ensure you always remain compliant. To understand your tax obligations fully, a fractional CFO will follow these tactical steps.
- Establish a system so you stay up-to-date with tax laws.
- Implement regular training sessions for your finance team and anyone else who needs to know about tax compliance within your company. Regular training helps prevent misunderstandings and equips your team to handle tax obligations proactively.
- Consult with tax professionals who specialize in your industry. Your fractional CFO may also be a tax expert, ensuring your business meets all its obligations without missing critical deadlines or details.
You can minimize tax risk by ensuring you and your team fully understand your tax obligations at whatever stage of growth you’re in. Avoid serious risks by staying informed, providing regular training, and consulting with the experts.
#3: Keep That Paper Trail
This strategy falls within the same wheelhouse as accurate reporting. You want to keep a paper trail to ensure you get every deduction, avoid inaccurate tax filings, and prepare yourself for potential audits. No one wants to be under an IRS microscope, so you’ll want an experienced fractional CFO to ensure you clear the authorities and not jeopardize your financial stability.
Tax problems don’t bode well for securing funding or planning for growth, and a fractional CFO can address these risks for you by doing the following.
- Implementing a structured filing system, both digital and physical, ensuring all of your financial documents are easy to retrieve and well-organized.
- Establishing a routine for regular check-ins and updates. You want your financial records to be current, so review them frequently to catch problems early.
- Leveraging Cloud-based solutions to store your records securely, protecting your paper trail from physical damage or loss and keeping it secure and accessible.
Poor record-keeping is a serious risk that you want no part of. With the right strategies, your fractional CFO will help you avoid costly penalties and remain compliant.
#4: Don’t Pay More Than Necessary
You don’t want to leave money on the table, and overlooking tax credits and deductions does just that. If you’re so laser-focused on growth, you may miss out on valuable tax-saving opportunities, which means paying more than you should.
Paying unnecessary taxes means less money to invest in growing your business. How can a fractional CFO help you get the most deductions and tax credits? A good one will be well-versed in tax law and should be able to identify credits and deductions that are most beneficial for you at your current stage of growth.
A few ways your fractional CFO will optimize your credits and deductions are:
- Conducting a comprehensive review of your business to identify all potential tax credits and deductions.
- Developing a strategic tax plan that integrates those credits and deductions into your overall financial strategy.
- Providing ongoing financial guidance to help you navigate the complexities of your business and taxes.
Don’t leave your hard-won money on the table. A fractional CFO will help you identify eligible credits, develop a plan of attack, and provide the ongoing guidance you need to ensure you’re maximizing your tax savings and minimizing tax risk.
#5: Avoid Payroll Tax Mistakes
It’s easy to misstep in this gig, distributed workforce economy. You might misclassify employees, fail to withhold the right amounts, or miss payment deadlines, leading to unnecessary and often huge penalties and interest. You might be tempted to classify a worker as an independent contractor to save on payroll taxes, but that's not the right approach to growing a successful business.
To avoid this problem and minimize your tax risk, a fractional CFO can help you by:
- Ensuring the accurate classification of workers.
- Using automated payroll systems.
- Setting up reminders or automated payments to ensure payroll taxes are paid on time.
A fractional CFO keeps you up-to-date with IRS guidelines and keeps your business in good standing. It’s also worth noting that each state has its own tax obligations, so you’ll want to track your employee’s locations and stay informed about state-specific tax laws and regulations.
This is where detailed records and accurate reporting come in handy. A fractional CFO will provide ongoing expertise at a fraction of the cost of a full-time CFO and establish robust internal controls to ensure you’re always compliant with tax regulations.
#6: Separating Personal and Business Expenses
In the early stages of growing a company, founders often blur the lines between personal and business expenses, using personal funds to cover those expenses. But mixing the two can complicate your financial life. As you grow, creating an accurate, clear, and positive financial narrative is critical to help with future growth and funding opportunities.
Solving this problem might seem simple, but it’s easy to fall into the trap without meaning too. Here’s how to ensure your business expenses stay in their own lane.
- Maintain distinct bank accounts and credit cards for personal and business use. This is such a simple yet effective measure that can protect your personal assets.
- Keep detailed records (are you noticing a theme?) to help with tax preparation and paint a clear financial picture of your business operations—where you need to optimize, and where you’re excelling.
- Educate your team about taxes, business expenses, reimbursements, and how to document and categorize everything related to the business. You want to ensure consistency and compliance across the board to avoid any financial missteps.
A fractional CFO is a cost-effective solution to provide your company with financial guidance to set your business on the right path.
#7: Expand Internationally Carefully
Expanding internationally is an exciting milestone! It’s also complicated as you cross oceans and country borders. The risks are numerous, and you will need a tax professional who understands foreign taxes. You don’t want to run into hefty fines, double taxation, or legal trouble.
How do you navigate foreign waters?
- Hire an expert. You’ll need a team that might consist of a fractional CFO and international tax advisors who know what’s required to comply with foreign tax laws so you can avoid costly mistakes. A fractional CFO can also assist in structuring your business to maximize your profitability and minimize your tax liability.
- Ensure your transfer pricing policies are compliant with international standards. That means all intercompany transactions must be priced at arm’s length to avoid scrutiny. Failure to comply with transfer pricing regulations could lead to significant penalties and adjustments. Your fractional CFO will document all of this properly to protect you in case of an audit.
- Maximize your use of foreign tax credits to avoid double taxation. The rules around foreign tax credits are confusing, but they can minimize your overall tax burden.
A fractional CFO will help mitigate tax risk as you expand internationally.
How a Fractional CFO Minimizes Tax Risk
There’s always some level of tax risk when growing a company, but you can avoid common pitfalls with the help of a fractional CFO. Some of the key ways they can help you minimize tax risk are:
- Establishing compliance and financial controls, such as regular internal and external audits, and creating a culture of compliance.
- Keeping up with tax laws with ongoing training, staying informed about changes in tax laws, and evaluating how those changes affect your business.
- Developing a proactive tax planning strategy, ensuring you don’t leave money on the table.
- Leveraging technology for accurate financial reporting and providing secure and accessible information when you need it.
- Optimizing your business structure, payroll processes, and international tax strategy to maximize your tax benefits and minimize tax risk.
A fractional CFO is a wise investment in your company’s long-term health. Navigating the complexities of tax laws can be overwhelming, so take steps today to mitigate those risks and maximize your tax savings.
