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Discover 8 Lesser-Known Corporate Tax Planning Strategies

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If you own a small or mid-sized business that has yet to conduct corporate tax planning, you are operating at a disadvantage. Therefore, when the tax season arrives, don’t rush to find some ways of reducing the total tax costs. Instead, you should conduct strategic corporate tax planning and optimize tax costs in a systematic manner.

In this blog, we will also see the advantages of business tax planning and why it is crucial. We will discuss some smart corporate tax planning strategies for small businesses and enlist some significant tax-saving opportunities for businesses to minimize the total tax bill.

However, before we start with that, let us see what corporate tax planning is.

What is Corporate Tax Planning?

Corporate tax planning is the act of assessing and analyzing the current financial standing of the business and utilizing strategies to minimize tax liabilities. However, it is a comprehensive process that involves and requires:

  • assessing business structure
  • proficiency in tax laws and regulations
  • making informed decisions
  • taking advantage of income-shifting
  • tax deductions, credits, exemptions, and incentives
  • ensuring compliance with legal regulations

Why is Corporate Tax Planning Important?

Without business tax planning, you’d be spending too much on the overall taxes. Not planning your taxes earlier means missing out on opportunities such as tax deductions, credits, breaks, and exemptions and shifting the taxable income and tax bracket. Business tax planning essentially reduces the overall tax liability.

With that, it also saves time as you carry out your taxation and related accounting operations systematically and in an organized manner. With strategic planning, you have the knowledge and timeline for every financial document and report, and you don’t waste time waiting or searching for them.

Moreover, corporate tax planning helps you optimize your business plan and make informative decisions to allocate resources more efficiently. However, before you begin with corporate tax planning strategies, there are some basic aspects of business taxation you should know about.

Before You Begin – Fundamentals of Business Taxes

Corporate tax planning relies on some basic aspects of business taxes, which you must have a grasp of. Here are some highlights of business taxation you should go through.

Accounting Methods

There are two major types of accounting system a business use – cash accounting and accrual accounting. The cash accounting method helps in accelerating deductions and deferring income.

Tax Rates

The tax rate and liabilities are subject to the business structure, such as sole proprietorship, corporation, S corporation, C corporation, limited liability corporation, partnership, etc.

Revised Rates

Although the tax rate is fixed, it is frequently revised and adjusted depending on the economic situation. For example, the Inflation Reduction Act (IRA) of 2022 offered an alternative minimum tax (AMT) of 15% for certain large corporations. It also defined a 1% excise tax on corporate stock buybacks made by public companies.

Tax Brackets

The tax rate also depends on the income tax brackets the taxpayer falls in. The taxes for sole proprietorships and partnerships are paid in the name of the owners in their personal income tax returns.

Adjusted Gross Income

The total gross income is not taxable. Adjusted gross income (AGI) is the taxable income that you get after making adjustments and applying deductions to the total gross income.

Tax Deductions and Credits

Tax deductions are tax-saving opportunities the government offers to help businesses reduce their taxable income. Therefore, the business should know how to take benefit of tax-deductible business expenses to reduce the overall tax liabilities.

Additionally, charitable deductions and specific expenses help in tax deduction optimization. Tax credits are similar to tax deductions and are different in the respect that they are deducted from the tax bills, not taxable income.

Tax Benefits and Breaks

The government offers tax benefits to individuals and business owners of a specific community or a sect of society. This is done to promote the development of all. An example of tax benefits is tax breaks offered to minority-owned small businesses.

For more information on business taxation, explore our detailed guide on tax services.

The Role of Corporate Tax Planning Strategies

Use the information listed below to pick out the best corporate tax planning strategies. The right corporate tax planning strategies should help in one or more roles listed below:

  • putting into practice and assisting you in developing tax-efficient business accounting procedures.
  • evaluating the best tax-efficient business structure for your enterprise and, if required, offering guidance on corporate reorganization.
  • succession planning and long-term tax planning.
  • assisting you in fulfilling your corporate tax duties.
  • obtaining the optimal capital versus revenue tax treatment.
  • making plans to reduce taxes on significant transactions, like buying and selling real estate or selling a business.
  • utilizing tax breaks and advantages.
  • offering guidance on profit extraction that is tax-efficient.
  • optimizing any tax losses for effective use.

Smart Corporate Tax Planning Strategies for Small Businesses

Let us explore the top business tax planning strategies for small businesses. These tax planning strategies will help you reduce the overall tax liabilities.

1. Reconsider business structure

Tax rates and tax brackets depend on the business structure such as whether the business is pass-through or a corporation.

For example, pass-through businesses like sole proprietorships, LLCs, and partnerships don’t have to pay corporate income taxes. Changing the business structure might help save on tax costs.

For personalized advice on your business, consult a tax professional and get to know whether changing your business structure will be beneficial.

2. Plan your accounting method

Choosing and planning your accounting method is very important for corporate tax planning. Therefore, you should select whether you want to utilize the cash or accrual accounting methods.

The cash accounting method allows the business organization to benefit from accelerating deductions and deferring income.

3. Business income deferral

Deferred business income helps reduce taxable income and minimize the total tax burden. Whenever you can, defer the receipt of the income until the end of the financial year.

You must either postpone the completion of the projects or issue the invoices just before the financial year ends to defer the business income.

4. Acquire assets at the end of the year

If you have any plans to buy or acquire new assets for your business, you should time it strategically. The best timing is just before the end of the financial period, as it allows you to benefit from depreciation deductions or other applicable tax incentives.

By acquiring assets at the end of the year, you can increase non-cash deductions and reduce the total tax amount. This also includes any services that you will be using in the next year. You can prepay for these services at the end of this financial year.

5. Time the bonus and compensation payment perfectly

Did you know that it matters when you distribute bonuses and compensation? By timing the bonus and compensation perfectly, you can transfer it to defer income and save on the total tax amount. This may help to postpone the related income tax withholding and payroll taxes.

6. Utilize tax-efficient inventory management

Managing the inventory efficiently to reduce the overall tax liabilities is important. You can use the last-in, first-out (LIFO) method and match the higher-cost inventory with sales. This helps reduce taxable earnings.

7. Write off bad debts and worthless stock

When certain payments are delayed for a long time, and the business has no expectations that they will be repaid, they turn into bad debts. The bad debts and worthless stocks add to the tax burden of the company and should be written off.

However, as writing off a debt or a stock is a big loss, it should be only done for the debts and stock you don’t expect to benefit from. You can use account receivable services to ensure timely payment and less bad debts. Writing off a bad debt is not easy and requires carrying out complex accounting.

8. Setup Retirement Contributions

Contributions to certain accounts, such as retirement accounts, are tax-free. Therefore, for the business owners who file the tax returns of the business in their name, making retirement contributions is a good move to reduce the overall tax liabilities. Also, encourage your employees to make retirement contributions, as this benefits your business.

Connect With an Expert!

The above article will equip you with eight salient corporate tax planning strategies. The strategies will come in handy when you prepare the tax strategy for your company. However, business tax planning is an extensive niche, and there is a lot to know before you go ahead and draft a business tax plan.

The business tax plan must be efficient in reducing expenses, allocating resources, and predicting and managing risks. Therefore, it is important to consult an expert when preparing the corporate tax plan for your business.

To aid this cause, we have been offering tax advisory services with a no-cost trial. This will allow you to find the right tax advisory service for your organization. To take a free trial of our tax advisory services, dial +1(800) 580-5375 now and connect to our accountants.

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