Setting tax rates

Updated on Jul 29, 2016

Taxes are a fact of life in business, so you need to include a reasonable allotment for them. Don't stress too much about this, though. This is business planning, not tax planning. The taxes we’re talking about 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 make sure that your forecast includes basic tax coverage. In LivePlan, taxes are entered in the section of the forecast.

Setting tax rates #

  1. On the Forecast tab, click More, and then click Taxes:
    tax-nav.png#asset:1713
  2. Click the Set Tax Rates button:
    settaxrates.png#asset:1165

Step 1: Set corporate tax rates #

If your business is profitable in a given year, you will need to pay a variety of taxes on that profit. Enter an overall tax rate to include in your financial plan. 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. These taxes typically apply only when you are profitable. Unprofitable years may still have a tax burden for any profitable quarters, but the year should end up with zero taxes.

Note that this rate is only for income taxes. Employee-related taxes like payroll and social welfare taxes are covered on the personnel step. 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 (%):
    corporate-tax-rate.png#asset:1890
  2. Indicate how often you'll pay taxes (every month, once per quarter, or once per year):
    taxes-frequency.png#asset:1714
  3. Click Next to set sales tax rates. If you don't have any revenue streams in your forecast yet, just click Save & Close

Step 2: Set sales tax rates #

Note: This step won't appear if you don't have any 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 temporarily 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:
    tax-revenue-streams.png#asset:1715

  2. Enter the sales tax rate (%) that you will charge your customers:
    estimatedtax2.png#asset:1076

  3. Select how often you'll pay taxes (every month, once per quarter, or once per year):howoftentax.png#asset:1100

Editing tax rates #

  1. On the Forecast tab, click More, and then click Taxes:
    tax-nav.png#asset:1713
  2. Click the Set Tax Rates button:
    settaxrates.png#asset:1165
  3. Make the desired changes on the Corporate Tax and/or Sales Tax steps.
  4. Click Save & Close.

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, on the other hand, are added to your pricing and then those revenues are sent to your state and local government. This results in a net zero cost to your company.

taxes-pandl.png

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:

taxes-balancesheet.png

In the Cash Flow table, you'll see your tax entries expressed as "Changes in tax payable," meaning the increase or decrease in how much tax 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:

taxes-cashflow.png