The major U.S. corporate businesses—Apple, Microsoft, and Amazon, had an average income tax liability of $7.5 billion in 2019. Yet, they were constantly criticized for avoiding paying more than a billion in taxes.
Taxes are one of the most significant expenses any company faces. If a company pays less, it has higher earnings, resulting in a higher value for shareholders. So, it is no surprise that corporate businesses seek ways to reduce their tax burden. This is where the importance of tax planning comes into the picture.
Tax Planning—At a Glance
has always been a complicated task for corporations and individuals. The challenging tax environment has placed many CFOs in the difficult position of managing their tax activities while minimizing tax repayments. Delayed tax payments, alterations in tax regulations and tax policies, and many more challenges like these have been addressed most by financial corporations. Besides these, tax-related technology to eliminate manual processes has been a significant challenge.
Overcoming the complexity of tax planning requires adequate planning to reduce tax risks that affect a business in the long run. However, the government is undertaking broad yet active initiatives related to taxes, especially to counteract the economic impact of the pandemic. New corporate tax relief measures are expected to be implemented in the U.S., totaling $650 billion by 2023. If they plan their tax activities in advance, they can save a lot of money as a backup.
Tax relief measures play a pivotal role in corporate tax planning. These measures support corporations’ ability to meet specified tax-related activities and are designed to boost money flow to maintain a balance in the economy. So, the first step for businesses is to have a strategic tax plan in place, and for this, it is crucial to know the importance of tax planning.
“Before you plan a significant investment, be sure the money you have available won’t be used to pay taxes due tomorrow.”
- Luz Urrutia, Tax Expert, Opportunity Fund
Importance of Tax Planning
Tax planning is crucial to avoid illegitimacy and monetary risks for businesses and individuals. It helps manage changes in the financial ecosystem
and leads to more systematic economic operations. Effective corporate tax planning facilitates corporations and individuals to reduce tax costs and benefit from higher earnings. By saving costs, corporate businesses can easily earn more capital for shareholders and make reinvestments. Higher shareholder acquisitions and capital reinvestment are signs that the business is doing well and its finances are improving.
Well-planned tax activities are reflected in the company’s financial statements. Apart from this, the process also involves analyzing the financial situation, and according to it, a company can minimize its tax liability. Interestingly, at the end of the tax season, you can end up with hundreds of dollars in your accounts.
“You want to start planning to adjust retirement plan contributions, employee benefit plans, and capital expenditures in the previous financial year.”
- Bill Keen, Keen Wealth Advisors
So, how should you proceed with seamless corporate tax planning and reap the utmost advantages of tax planning? Read on to find out the essential aspects that should be considered when creating a strategic tax plan.
Top Four Corporate Tax Planning Strategies
Examine Your Accounts
A business encounters numerous types of expenses and also earns income from various sources. Therefore, it’s crucial to review business accounts with a tax advisor annually. A tax advisor can assist you in making necessary investments
or capital repositioning. Having expertise can lead to tax reductions in a corporate business. They can also give you updated tax laws, which can help you avoid paying more next year.
Plan Overall Tax Accounting Method
The tax accounting method
mainly focuses on generating tax benefits by accelerating tax deductions and deferring taxable income. This method also helps to increase the value of the earned tax amount in the current year. There are two main ways to conduct tax accounting—the accrual method and the cash method.
Corporates use this method to recognize earned income and expenses when the liability is fixed. On the other hand, corporations can benefit from planning their income in the year they pay taxes by investing more to reduce costs effectively.
Tax advisors can assist businesses in making divisions in income and expenses in the form of cash. These methods will help you plan taxes to get the net taxable income that corresponds to your profit.
Practice Charitable Contributions
Under corporate tax planning
, it is essential to contribute to charitable institutions. This can help to gain maximum tax benefits. Some of the charitable contributions that can be included are:
Investment in funds
The type of charitable contribution and the kind of asset donated are factors that can help corporates with tax reduction. Donations to a charity for education, non-profit organizations, foundations, and others certainly qualify for tax deductions. In this case, the IRS Tax Exempt Organization Search tool can benefit by verifying an organization’s tax-exempt status and determining its eligibility for deductible contributions. If corporates include charitable donations in their tax planning, then it can be a significant mode of tax return and savings at the same time.
Include Business Entity Type
Every corporate business has specific pros and cons regarding business entity type. According to the U.S. economic survey conducted in January 2019, the corporate tax rate was 21%. The survey also found that in 2019, corporate businesses were profitable in terms of tax as they were saved from high-valued advantages from tax liabilities. However, some corporate companies were also subjected to double taxation. In double taxation, the profit margins are taxed at a corporate rate. Even shareholders are taxed on their dividends. This means corporate businesses that haven’t included entities face burdensome tax payable amounts.
Therefore, it is advisable to include business entity types during corporate tax planning. Business entity types help to reduce business losses. However, shareholders must be paid a realistic return to have a business entity type. This also includes partnerships. A partner’s entity contributes to a guaranteed risk-free business. At the end of the year, partnership agreements
make allowances for income and its distribution so that tax savings can be made at the end of the year, too.
Corporate tax planning has numerous advantages. However, to reap the advantages of tax planning, corporates should plan within the applicable limits of tax laws to avoid tax. Changes in tax laws should also be considered so that corporate companies can change their investments to fit the law and terms of the tax plan.
Frequently Asked Questions
What are the methods of tax planning?
Tax planning can be done in many ways, depending on the tax advisor and the type of business. Some of the standard methods are as follows:
Short-term tax planning
Long-term tax planning
Purposive tax planning
Permissive tax planning
Why is it essential to plan a tax strategy?
Planning a tax strategy can reduce and save income tax for the current and future. Having a proper tax strategy in place will aid in maximizing the number of funds, reducing the cost of financing education, managing cash flow, and meeting expenses at the right time and the right way.
What precautions should be taken during tax planning?
Certain precautions should be taken during tax planning. They are as follows:
Show your account balance to a trusted tax advisor
Keep the interest certificate safe
Keep bank statements and passbooks updated
Rent and lease agreements