Setting tax rates

When planning your business, remember that taxes are a necessary expense that you need to factor into your projections. While it's important to be aware of the potential tax implications of your business operations, don't get too bogged down in the details. The taxes we're discussing here are theoretical expenses based on hypothetical profits, so it's not necessary to be overly specific. Simply set your standard rates to ensure your forecast includes basic tax coverage.

Note: If you're looking for employer taxes, please see Employee-related expenses: changing the Burden Rate.

Do I need to include taxes in my revenue streams?

There's no need to add tax amounts to your revenue stream entries. Just enter the actual revenue numbers with no tax added. LivePlan will calculate your taxes and add them to the forecast automatically.

Setting tax rates

  1. In the Forecast section, click Taxes:
    forecast_taxes_highlighted.png

  2. Click the Set Tax Rates button:
    set_tax_rates.png

Step 1: Set corporate tax rates

If your business is profitable in a given year, you must pay income taxes on that profit. Enter an overall tax rate. This estimated rate should cover all applicable income taxes — federal, state, local, etc. If you're unsure what to put, a 20% rate is probably close. It helps to remember that income taxes typically apply only in periods when your business is profitable.

Note that this rate is only for income taxes. Employee-related taxes like payroll and social welfare taxes are covered on the Personnel page. Other taxes, such as property taxes, are generally best added as regular expenses.

  1. Step 1 in this overlay relates to corporate taxes. Enter your estimated corporate tax rate (%):
    Estimated_tax_rate.png

  2. Indicate how often you'll pay taxes (every month, once per quarter, or once per year):
    how_often_will_you_pay_your_taxes_drop_down.png

  3. Click Sales Taxes from the top menu to set sales tax rates. If you don't have any revenue streams in your forecast yet, click Save & Exit:
    tax rates with cursor over sales tax.png

Step 2: Set sales tax rates

Note: This step will only appear if you have revenue streams in your forecast.

Some companies need to collect sales taxes from their customers. This might include a national general sales tax (GST), value-added tax (VAT), or other national, state, or local sales taxes. This sort of tax collection will not affect your profitability since you are obliged to pay the collected taxes to the government on a regular schedule. However, it will impact your cash flow projections for when you receive the revenue and when the taxes are due to the government. It's important not to treat collected tax money as readily available cash.

  1. On the Sales Tax step of this overlay, indicate which of your revenue streams you will collect sales tax for:
    sales_tax_select.png

  2. Enter the sales tax rate (%) that you will charge your customers:
    what_is_your_estimated_tax_rate.png

  3. Select how often you'll pay taxes (every month, once per quarter, or once per year):
    how often will you pay your taxes drop down.png

  4. Click Save & Exit:
    save and exit detail.png

Editing tax rates

  1. In the Forecast section, click Taxes:
    forecast_taxes_highlighted.png

  2. Click the Set Tax Rates button:
    set_tax_rates.png

  3. Make the desired changes on the Income Tax and/or Sales Tax steps, then click Save & Exit to return to your forecast:
    save and exit detail.png

Where does this entry appear in the financial statements?

In the Profit and Loss table, you will see only income (or corporate) taxes. This is because paying income taxes is an expense of running a profitable business. Sales taxes are not included in a Profit & Loss table but do appear on the Balance Sheet and the Cash Flow table.

Forecast_P_L_example.png

 

The Balance Sheet lists income and sales taxes under Current Liabilities, as illustrated below. You may need to click the arrow to the left of Current Liabilities to expand that heading to view the Income and Sales Taxes Payable lines. If you pay your taxes quarterly or annually, the amounts will increase until the month in which you make the payment:

Balance_sheet_example.png

In the Cash Flow table, your tax entries are expressed as "Changes in tax payable," meaning the increase or decrease in how much you owe in a given month or year. In the example below, we're paying taxes quarterly. So the changes are positive (meaning we owe more) in months where we're accruing taxes and negative in the months in which we pay taxes:

Cash_flow_example.png

Why can't I see cumulative tax totals in my financials?

The Profit & Loss, Balance Sheet, and Cash Flow reports represent your income and sales taxes. In all three cases, you will see only payable totals -- or the amount of tax you owe -- in any particular month.

At the end of each year of your forecast, you'll see the sales tax you owe at the end of the year. That amount isn't a total; it will vary based on whether you plan to pay your sales taxes monthly, quarterly, or annually. 

Your income taxes will appear as an annual total in the Profit & Loss statement.

Note: The Accrued and Paid totals will be different because you'll end each year owing some taxes as of the final month of the year. These are paid at the start of the following year.

Why don't I see income taxes in my forecast?

Looking at your Profit and Loss statement, you may notice that there are periods where, even though you've earned income, no income taxes are charged - as in the example below:

no_income_tax_P_L.png

Below, we will discuss the two possible reasons you might see zero income taxes in months you earned income.

Negative net profit

In any period where your net profit is negative, LivePlan won't calculate any income tax. This is because income tax is only assessed on your profits. You won't be taxed when you earn zero profit or lose money in a month.

In the example below, you can see the bottom line showing negative net profit, and in each of these months, zero income tax was calculated:

negative_net_profit.png

Recovery from a negative net profit

When a business shifts from making a loss to generating a profit, it doesn't necessarily mean it will pay taxes on that profit immediately. This delay occurs because the business must first offset its past losses with its current profits before any tax is due. During this period of recovering losses, the business is not subject to income tax.

For clarity, consider a hypothetical scenario: a business earns a consistent $1,000 monthly revenue and is subject to a 25% income tax rate. In the first month, the business incurs a $2,500 expense, leading to a $1,500 loss. Since the business didn't make a profit, it owes no income tax for that month.

profit and loss tax example.png

In the second month, the business again earns $1,000, but with no additional expenses, it realizes a $1,000 profit. However, this profit doesn't offset the $1,500 loss from the first month, so the business still doesn't owe any income tax.

By the third month, another $1,000 profit brings the cumulative profit over the three months to $500. Now, this cumulative profit is subject to the 25% income tax rate, resulting in a $125 tax bill for the third month. Going forward, assuming the revenue and expenses remain the same, the business will be taxed $250 monthly, which is 25% of the $1,000 monthly profit.

Representing VAT, HST, or GST in your forecast

We recommend a simple approach to estimating corporate and sales taxes for business planning purposes. LivePlan uses a single flat percentage to calculate each of these.

For those operating outside the United States, you might encounter more complex sales tax systems, such as VAT (Value Added Tax), HST (Harmonized Sales Tax), or GST (Goods and Services Tax). While LivePlan does not provide detailed tracking of the tax payments and credits associated with these systems, you can still utilize the uniform percentage approach to achieve a reasonably accurate tax forecast.

When accounting for sales tax credits or the taxes on expenses and asset purchases, we recommend calculating the net percentage by subtracting your tax credits from the taxes you pay. For instance, if your standard VAT/HST/GST rate is 25% and you receive a 5% tax credit, your net tax rate would be 20%. Setting this 20% as your sales tax rate in LivePlan can offer a close approximation of your tax obligations. You can configure this tax to be paid out monthly, quarterly, or yearly.

Note: with this approach, all taxes will appear on the Sales Taxes line of your Balance Sheet and Cash Flow. LivePlan isn't configured to generate a separate line for VAT.

More on taxes:

 

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