Businesses and individuals work to reduce their tax liabilities when they file their tax returns every tax season. But there is a more proactive way to ensure your company pays the least amount of taxes through tax planning. We’ll explain the difference between tax planning vs. preparation and offer some tax planning strategies.
What is Tax Planning?
Tax planning is the analysis and strategy to ensure a business or individual pays the lowest taxes required by law, also called tax-efficient. There are several strategies or financial plans one can implement to ensure an individual or business is tax efficient at the state and federal level for the current year and in the long term.
Several factors can affect your tax planning strategy, and it can take a village of tax professionals to maximize every tax advantage. These factors include:
- Tax Bracket
- Timing of Purchases
- Timing of Expenditures
- Type of Retirement Plan
- Types of Investments
These factors must be carefully orchestrated throughout the year to reduce the tax liability to the lowest legal amount.
Related Link: IRS Announces New R&D Tax Credit Guidelines
How is Tax Planning Different from Tax Preparation?
Tax planning is a more involved strategy that requires actions throughout the year, whereas tax preparation is the process of gathering all financial documentation and filing the tax return. Tax planning is an orchestrated strategy to minimize the tax liability as much as possible. Planning differs significantly from preparation in the following ways:
The Team & Time Commitment
Individuals who utilize an accountant to prepare their taxes may meet with the account one or two times between January and April to collect and file the tax return. Depending on the complexity of a return, some individuals may opt to use tax software rather than meet with a CPA to complete their tax returns.
Tax planning is way more involved. It can be a year-round process that includes a team of professional enrolled agents, tax attorneys, and tax CPAs to create a strategic plan to minimize the tax liability. Each of these individuals brings in-depth experience and knowledge of tax law to find every advantage in the tax code to be tax efficient.
Long Term Planning
Tax preparation focuses on completing the tax filing for the given year. Tax planning is a long-term solution for minimizing tax liability as wealth grows. Your tax planning team can assess, based on the current tax return, what to do for the future to ensure that taxes are as low as possible by identifying strategies to leverage in the future.
The individual or business will want to meet with their tax planning agency quarterly or monthly, depending on what the strategy requires. This can ensure that a company is doing everything during the quarter to lower the tax liability.
Why is Tax Planning Important?
For individuals and businesses, there are several key benefits to tax planning besides saving money:
- Increases revenue
- Resources for growing the business or personal investments
- Streamlines tax preparation
- Reduces legal hassles
- Segments taxable income into diversified investments
- Contributes to the country’s economic growth
- Increases economic stability
Tax Planning Strategies
When meeting with your accounting firm, you’ll want to have a fundamental understanding of the basic tax planning strategies that are used to lower your taxable income and tax liability:
Know Your Tax Bracket
Understanding your business or individual current tax bracket is critical. The government will change the tax brackets for various reasons, and it can change year by year. For example, for the tax year 2022, the IRS has adjusted tax brackets for annual inflation adjustments.
Knowing your tax bracket helps to determine how much you’ll be charged for the current and upcoming year. You’ll want to plan how to pay for your tax liability and look for ways to reduce your taxable income through available deductions and credits. This is especially true if you are in between tax brackets. You’ll want to lower your taxable income to be in the lower tax bracket.
Maximize Your Deductions and Credits
The federal and state tax codes allow for a wide variety of deductions and credits depending on your business size, industry, donations, research, expenses, assets, etc. It’s critical to plan ahead of the taxable year with your tax planning team and track federal tax legislative proposals to take advantage of all the deductions and credits that you can qualify for and claim.
Because the tax codes update and change continually, it’s critical to have a reputable accounting firm proactively analyze and assess how your business can benefit from the current tax code. They can advise you on how to maximize your deductions for each quarter and qualify for credits throughout the year so that you are tax-efficient when it comes time to file.
Aren’t sure what tax credits your business qualifies for? Contact us for advice on which credits you qualify to use.
Related Link: How To Claim the Employee Retention Tax Credit
Select Other Tax Strategies That Can Benefit Your Business
There are a host of viable tax planning strategies that can lower your taxable income and increase your deductions and credits. Talking with an accounting firm before the next tax year about all your options is critical. Here are some common tax planning strategies businesses use:
- Donate to charities
- Consider traditional tax accounting method changes
- Implement a “reverse” tax accounting method
- Write-off worthless stocks and bad debts
- Maximize interest expense deductions
- Increase tax benefits from net operating losses (NOLs)
- Defer tax on capital gains
- Plan for international operations
- Review transfer pricing compliance
- Utilize state pass-through entity elections
Talk to a tax planning specialist to maximize your tax credit and deduction potential.
Tax Planning is Critical for Lowering Your Tax Liabilities
Businesses and individuals should incorporate a tax planning strategy with their accounting agency on a quarterly or monthly basis to ensure they are tax-efficient when it comes time to file their tax returns.
Tax Hack is a tax advisory firm with in-depth expertise in the technology sector, helping innovative tech and internet companies maximize their tax savings through strategic tax planning. We understand the intricacies of technology start-ups and can ensure your business is tax efficient.
Need accounting advice on how to plan for the next tax year? Talk to one of our tax planning experts.
Related Link: The Best Tax Credits Available Right Now for 2022