Taxes are a fact of life in business, so you need to include a reasonable estimate for them in your forecast. Don't stress too much about this, though. This is business planning, not tax planning. The taxes we’re discussing here are theoretical expenses based on theoretical profits. It would be silly to get too specific about the details. Just 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
- In the Forecast section, click Taxes:
- Click the Set Tax Rates button:
Step 1: Set corporate tax rates
If your business is profitable in a given year, you will need to 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 not sure what to put, though, 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.
- Step 1 in this overlay relates to corporate taxes. Enter your estimated corporate tax rate (%):
- Indicate how often you'll pay taxes (every month, once per quarter, or once per year):
Click Sales Taxes from the top menu to set sales tax rates. If you don't have any revenue streams in your forecast yet, just click Save & Exit:
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. But it will affect your cash flow projections for the time between 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.
On the Sales Tax step of this overlay, indicate which of your revenue streams you will collect sales tax for:
Enter the sales tax rate (%) that you will charge your customers:
- Select how often you'll pay taxes (every month, once per quarter, or once per year):
- Click Save & Exit:
Related: Representing the VAT, HST, or GST in your forecast
Editing tax rates
- In the Forecast section, click Taxes:
- Click the Set Tax Rates button:
- Make the desired changes on the Income Tax and/or Sales Tax steps.
- Click Save & Exit.
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.
In the Balance Sheet, income and sales taxes are listed as shown below. If you're paying your taxes quarterly or annually, you'll see the amounts increase until the month in which you pay:
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:
Why can't I see cumulative tax totals in my financials?
Your income and sales taxes are represented in the Profit & Loss, Balance Sheet, and Cash Flow reports. 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:
Below we will discuss the two possible reasons you might see zero income taxes in months where you earned income.
Negative net profit
In any period where your net profit is in the negative, LivePlan won't calculate any income tax. This is because income tax is only assessed on your profits. In a month where you earned zero profit or lost money, you won't be taxed.
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:
Recovery from a negative net profit
There will usually come a point when a business with negative profit begins showing a positive profit. But at this point, even though you are showing a profit, that profit might not be taxable immediately.
This is because your business may need a few months of positive profitability to make up all of the losses in the negative-profit months. While your business is making up those losses, you won't be charged income tax.
In the example below, the business is showing a negative net profit in Month 1 of 30% and 20% in Month 2.. These months add up to a 50% loss. But then in Month 3, the business becomes profitable. The 15% profit in Month 3 and 20% profit in Month 4, however, hasn't quite made up for the earlier 50% loss. So Months 3 and 4 won't be taxed. Finally, the deficit is made up in Month 5, and so income tax begins in Month 5:
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.
If you're outside the U.S., you may need to represent a more complex sales tax system, such as the VAT, HST, or GST in your forecast. LivePlan isn't able to track the tax payments and credits involved in these types of taxes in detail. Still, you can use the flat-percentage model to get a reasonable overall estimate of your taxes for forecasting.
To represent sales tax credits, or taxes paid on expenses and asset purchases, we usually recommend determining the difference between taxes paid and tax credits, and using that as your flat sales tax percentage in LivePlan. So, for example, if you usually charge 25% VAT/HST/GST but get a 5% tax credit, the cumulative difference is 20%. Using that 20% as your sales tax setting in LivePlan should get you a close estimate of your tax liability. Tax can be set to pay out monthly, quarterly, or annually.
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.