The Role of Tax Planning in Financial Management


Your process of tax planning can assist or hinder your business’ growth. Smart planning and strategies allow you to pay less to the government and state and keep more in your business’s bank account over the long term.

However, planning requires a proactive approach and must be performed before the end of each quarter for it to be beneficial.

Understanding Tax Planning

Tax planning is an entire specialization of some accountants, and it’s one that corporations spend a lot of money on to ensure that it works in their best interests.

Concept and Process of Tax Planning

The business process of tax planning involves:

  • Full analysis of the company’s finances
  • Income timing
  • Size of the business
  • Purchase timing
  • Expenditure planning

For example, if a corporation plans to make a hefty expenditure and spend $1 million on a new office, the tax professional may determine that waiting until the next year is optimal. Why? Expenditure planning may show:

  • Waiting a year will allow you to take a larger deduction
  • Next year’s tax deduction may be more beneficial

If you plan on generating significantly more income next year due to contracts that are set to start at that time, deducting the expense may help offset your tax burden.

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You’ll still need to pay taxes, but tax planning can help reduce the amount you pay.

Types of Tax Planning

Tax planning can have many moving parts, and accountants can focus on multiple areas:

  • Short-term planning is meant to take steps to reduce your overall tax burden before the end of the fiscal year.
  • Long-term planning, which may not save you as much money in the short term, but in the long term, can provide substantial savings.
  • Permissive planning involves utilizing deductions and incentives to reduce tax burdens. For example, companies may meet certain thresholds to reduce their taxes in certain industries.

An accountant will help you implement the ideal tax strategies to reduce your business’s tax burden.

Benefits of Effective Tax Planning

What is effective tax planning? It’s all about saving money. The key benefits include:

  • Paying less taxes overall
  • Keeping more money in the bank
  • Lowering your corporate tax bracket

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The Role of Tax Planning in Financial Management

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Tax planning helps you better manage your finances with:

  • Lower expenditures
  • Higher savings

Strategies for Effective Tax Planning

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Maximize Tax Deductions

One of the simplest and most effective tax planning strategies is to maximize your tax deductions. Businesses can write off eligible expenses to reduce their taxes, including costs associated with running your business, employee benefits, charitable contributions and more.

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Work with your CPA to ensure you’re maximizing your deductions.

Leverage Tax Credits

Along with maximizing your deductions, you also want to make sure that you’re leveraging tax credits, such as:

  • Work Opportunity Tax Credit 
  • Disabled Access Tax Credit
  • Small employer health insurance premiums credit

Defer or Accelerate Income

If your business uses the cash method of accounting, you may consider deferring or accelerating income, depending on your situation.

For example, if you expect to be in a lower tax bracket next year, you may want to defer income to next year to pay a lower rate. 

On the other hand, you may want to accelerate your income if you expect tax rates to increase in the near future. 

Purchase Assets at the End of the Year

Another effective tax planning strategy is to time the purchase of major assets until the end of the year to maximize eligible business expenses.

Challenges in Tax Planning

Proper tax planning can help businesses effectively and legally reduce their tax burdens. While there are many advantages to tax planning and strategies to employ, there are also challenges that cannot be overlooked, including:

Estimated Taxes

Businesses pay estimated taxes at the end of each quarter. Strategizing quarterly payments can be challenging if you experience an unexpected spike in sales or expect to have a much more profitable year.

Timing of Purchases

One common tax planning strategy is to time major purchases so that they help reduce taxable income for the year. Timing these purchases can be tricky or impossible in some cases. 

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Time and Cost

Tax planning takes time. Your CPA can likely help with tax planning, but make sure that you discuss their fees and understand all of the costs associated with this service.

In Conclusion

Effective tax planning can save your business money. Having a better understanding of how the process works and the potential challenges you may face can help you maximize the benefits of tax planning strategies. Working closely with a CPA is advised.

This article was written and professionally proofread by the team at Netrocket.


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