The tax system is complex and confusing, which leads to many small businesses not understanding how it can help them grow. Taxes are a huge expense for companies, but understanding and implementing the right tax strategies can lower these costs significantly.
Many different tax planning strategies can be used when setting up a business. In this post, we’ll help you identify which ones would be best for your company and give you an overview of what they are.
What’s Tax Planning?
Tax planning is a way to reduce tax liabilities by analyzing a financial situation, viewing efficient investment opportunities, and finding deductions, exemptions, and benefits. A good tax plan saves you money and can help you avoid fines and penalties for late filings.
Tax Planning Objectives
The objectives of tax planning can vary but generally aim to reduce the amount of income taxed and maximize deductions and benefits. Taxpayers may also seek to minimize penalties for non-compliance with the law. There are many different ways in which taxpayers can achieve these objectives.
Tax planning is a very important part of financial planning. When done efficiently, tax planning allows taxable income to be channeled into other investment opportunities, freeing the individual of tax liability.
Types Of Tax Planning
Understanding the different types of tax planning is important because it allows you to choose the type of tax planning that is most effective for you. Each type has its own set of benefits and limitations, so it is important to choose the one that will allow you to achieve the goals that you are trying to achieve.
Let’s take a look at the different types:
Purposive Tax Planning
Purposive tax planning aims to create tax plans with defined objectives. It applies tax laws in a strategic form to take advantage of tax benefits. It does so by developing a suitable plan for replacing assets, selecting wise investments, switching the residence status, and diversifying company ventures and income.
Permissive Tax Planning
Permissive tax planning creates plans that stay under the framework of the law. This type of tax planning takes advantage of various exemptions, deductions, and concessions while following all the rules permissible under various tax provisions and frameworks of law.
Short-Range Tax Planning
Short-range tax planning involves devising and executing tax payments at the end of the fiscal year. Investors use this type of tax planning to try to legally reduce their tax liabilities. Short-range tax planning does not involve long-term commitments, while it still promises substantial tax savings.
Long-Range Tax Planning
Long-range tax planning is a strategy businesses use to minimize the amount of taxes paid due to events occurring in future years. This type of planning is an effective and legal way for any business involved in the sale of goods and services, including small businesses, sole proprietorships, and other entities, which can save you money on your income taxes by reducing future tax liability.
Tax Planning Benefits
When individuals and businesses prepare the best way to minimize their tax liability, they often overlook some benefits. These benefits include:
Minimizes Litigation: Taxpayers who plan and file their taxes correctly may avoid or have lower litigation costs. Properly structured business and estate tax returns can help minimize disputes with the IRS, minimize taxes owed, and preserve family wealth.
Reduces Tax Liability: Tax planning can reduce your taxes by saving on taxes owed, reducing the taxable estate, and manipulating taxable income. Tax planning can also reduce your taxes owed by minimizing the amount of taxable income.
Ensures Economic Stability: Tax planning can ensure economic stability and empower businesses to be more productive. It can help stabilize a business during economic downturns and protect a business’s equity.
Leverages Productivity: Tax planning can also help companies be more efficient by identifying and exploiting tax breaks.
Avoid Penalties For Failing To Pay Estimated Taxes: Tax planning allows you to be prepared for your taxes; it helps you avoid penalties you might encounter if you fail to pay the estimated taxes you owe.
What Are Tax Planning Strategies?
Tax planning strategies are used to mitigate and reduce the amount of taxes a company pays. This can help protect companies against future cost increases, which could happen if tax rates increase.
Tax planning strategies can help managers make the most of their tax situation – whether they’re start-ups looking for the lowest possible rates or established businesses with complex corporate structures. There are many different types of strategies, so it’s important to understand what types of benefits you may need before you decide on a strategy.
Types Of Tax Planning Strategies
Tax planning strategies are a way to reduce the amount of taxes that you have to pay. They are methods that anyone can use, regardless of income, to ensure they’re paying as little tax as possible.
- Making use of deductions, exemptions, and credits
- Maximizing retirement account contributions
- Purchasing life insurance with a death benefit exclusion
- Investing in real estate or private equity investments with favorable depreciation rules
- Setting up trusts for your children or grandchildren.
Each strategy has a different level of complexity, associated costs, and potential tax benefits. There are many ways tax planning helps both individuals and businesses. It’s important to look at both approaches to understand their importance better.
Tax Planning Strategies For Individuals
Tax-saving opportunities provide an immense advantage to individuals who may be financially struggling —- like recent graduates, college students, etc.— reducing their tax obligations and the amount of taxes they need to pay. Let’s take a look at what strategies can help with this:
- Filing as single or head of household to take advantage of the various deductions and credits available.
- Claiming capital gains and losses on taxable investments may be offset against other income sources.
- Using shelters such as retirement accounts, 401ks, individual retirement accounts (IRA), etc.
- Estate planning using trust structures or converting assets more easily subject to inheritance taxes.
Tax Planning Strategies For Businesses
Business tax planning strategies are about the manner of feeding your business needs. This can include strengthening financial growth, balancing costs and income streams, and using tax refunds. Let’s take a look at some strategies that can help improve your business:
Use Deductions And Credits: This involves claiming specific expenses as business income rather than taxable personal income. This allows a company to reduce its overall tax liability by reducing its net taxable income.
Use Of Limited Partnerships, S Corporations, and Partnerships: By using these types of businesses, a business can structure its operations to minimize its tax liabilities.
Adjusted Gross Income For Various Deductions and Credits: These deductions and credits include the cost of goods sold, the interest that the business pays, the depreciation, and contributions that the business makes to employee benefit programs.
Discussing your strategies with professional tax services can help you better understand how they work and how to best apply them to your business.
How Do Tax Planning Strategies Benefit Individuals?
Tax planning looks closely at a person’s financial situation to maximize tax efficiency. It involves integration into a plan that looks to allocate savings. This helps you be conscientious with your spending and saving, so when the tax bill comes, you’re not just reacting.
Tax planning looks closely at many factors to ensure efficiency:
- When income is received
- When a purchase is made
- Tax filing and deductions
- Savings and retirement
Some of the benefits for individuals include:
You Can Reduce Your Tax Liability: This can result in a reduction of your taxable income. You may also be able to reduce your tax liability through the use of tax shelters and deductions. In some cases, you may be able to reduce your tax bill by taking advantage of special rules that apply to you.
It Can Protect Your Assets: Tax planning can also help protect an individual’s assets by reducing the risk of taxable events.
It Helps You Save Money: The government collects taxes from individual earners and then distributes them among the various government agencies per the tax laws.
How Do Tax Planning Strategies Benefit Businesses?
Managing taxes has always been a headache for both small and large businesses. Taxes can eat away any profits a business would have enjoyed, which no entrepreneur wants to see. As it turns out, tax planning benefits aren’t just reserved for individuals — they have a lot to offer businesses and their owners.
Many benefits can be gained through the use of effective tax planning strategies, including:
Reduced taxes: By using a variety of legal tax avoidance mechanisms, businesses can often reduce the amount of money they pay in taxes each year. This reduction in taxable income can save companies hundreds or even thousands of dollars annually.
Increased wealth and prosperity: A well-planned strategy for taxation will lead to increased wealth and financial stability for a business over time.
Increased competitiveness: With reduced taxes, businesses are in a better position to compete with their rivals. This increased competitiveness can lead to higher profits and, eventually, to larger employee salaries.
Increased funding: Reduced taxes can also lead to increased funding for the business. This increased funding can be used to fund new projects or to increase the company’s stock price.
Greater flexibility: By knowing which expenses are and are not allowed to be paid from profits, businesses have greater flexibility in their financial planning. This increased flexibility can lead to more efficient decision-making and better execution of the business plans.
Failing To Pay For Taxes
Taxes are one of the most important financial obligations that a business must pay. Failure to plan for taxes can lead to serious consequences, including fines and tax penalties. Failing to file your taxes on time can also result in criminal charges. In some cases, you may even be subject to wage garnishment or seizure of assets.
Implement Tax Strategies
Now that you’re aware of the different strategies that can benefit you as a person or business, it’s time to implement them to get the most out of them. At Nesso Group, we understand that approaching these strategies and selecting which ones work best for you can be challenging.
Our Nesso Tax team can give you all the information you need to make an informed decision and guide you through the process so you know our approach. We believe in open communication and transparency with our clients. Don’t hesitate to reach out now to get started and learn what we can do for you.