Tax Planning in the Business Environment

Effective tax planning is essential for business success.

Taxes can eat away at business profits. To address it, small business owners and corporate leaders look for ways to reduce their tax liability--and the tax planning process is an integral part of this activity.

Identification

Tax planning is the act of developing a plan to minimize or defer taxes paid against current business revenue or income. The planning process includes understanding all local, state and federal tax obligations, determining which deductions are available and how and when to pay each tax.

Function

The essence of tax planning is determining how to maximize tax deductions against current revenue. Options include, but are not limited to, deductions associated with incorporation status (sole proprietorship, S-corporation, LLC or C-corporation), capital expenditures and setting up 401(k) plans for employees. Business owners use the tax planning process to find and take advantage of all deductions available.

Significance

Companies decide whether to expand and hire new employees based on their tax burden. For this reason, tax planning is crucial and business owners do it religiously every year.

References

• Bloomberg Business Week: Today's Tip Tax Planning Considerations for Your Business
• Financial Planning Tool Kit: Tax Planning
• Forbes: Tax Planning