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Tax management and planning are both important to the successful operation of any business. Both functions can be thought of as planning for optimal tax outcomes in a given year. Tax management refers to planning activities that reduce taxes payable in a given period; by contrast, tax planning refers to activities that reduce taxes payable over multiple periods. The major challenge that most businesses face is how to reduce their tax liability while also remaining compliant with all applicable laws and regulations. Depending on your unique set of circumstances, consulting with an accountant or other financial advisor can help you identify strategies that meet your personal objectives without jeopardizing your future financial well-being.
Tax management
Tax management refers to the ongoing monitoring of a company’s tax obligations and the implementation of corrective measures when appropriate. It includes activities such as monitoring incoming and outgoing payments to ensure that they are being made at the proper times and in the right amounts. Tax management emphasizes the immediate and short-term effects of tax payments and may involve little or no planning for the long-term. Tax management is also concerned with the collection of past due tax obligations from third parties. This may involve the use of official government channels or the hiring of a private collection agency.
Tax planning
Tax planning refers to activities that reduce tax liabilities for a business over multiple periods. The major difference between tax management and tax planning is the long-term perspective that is implicit in the latter term. The goal of tax planning is to achieve optimal tax results over a period of years by taking advantage of timing differences between taxable events and accounting rules.
Tax compliance and tax avoidance
Tax compliance refers to all activities that keep a business on the right side of the law. It includes both the timely and accurate payment of taxes as well as the proper maintenance of records that document all financial transactions. While all taxpayers are required to comply with the law, taxpayers who engage in tax avoidance attempt to use legal means to reduce their tax obligations. This can be done by taking advantage of tax breaks, deductions, and other opportunities provided by the government in order to minimize the amount of tax that is owed. Tax avoidance is not illegal as long as the taxpayer has acted in good faith and within the bounds of the law. Taxpayers who engage in tax evasion, however, are breaking the law. This can include falsifying documents, making fraudulent statements, or otherwise attempting to trick the system and avoid the taxes that they owe.
Strategies for effective tax management and planning
The following list highlights eight key strategies for effective tax management and planning. For each one, you’ll also find a discussion of the challenges that are associated with it. By becoming aware of these challenges, you can better prepare yourself to meet them head-on. - Choose the right business structure for your situation - The type of business that a company operates will have a significant impact on its tax obligations. Thus, careful consideration of the different types of business structures is key to an effective tax strategy. - Match the timing of taxable events with your accounting method - Taxable events that occur outside of a company’s fiscal year can be deferred to the next tax year. This includes the re-sale of inventory that has been purchased by the company in the current year. - Maximize your tax deductions - Deductible business expenses can reduce your taxable income and thereby lower the tax that you owe. However, the rules governing which expenses are deductible are highly complex. - Pay your taxes as early in the year as possible - Doing so will allow you to take advantage of the normal payment credits that are available to taxpayers. It will also help you to avoid incurring penalties for late payment. - Minimize the amount of cash that you hold on hand - The less cash that you have, the less you will have to pay in taxes on it. - Consider your options for financing your business - By taking on debt to finance your business, you will likely have to make interest payments. This can reduce your taxable income at the end of the year.
Conclusion
Tax management and planning are essential to the successful operation of any business. Both functions can be thought of as planning for optimal tax outcomes in a given year. Tax management refers to planning activities that reduce taxes payable in a given period; by contrast, tax planning refers to activities that reduce taxes payable over multiple periods. The major challenge that most businesses face is how to reduce their tax liability while also remaining compliant with all applicable laws and regulations. Depending on your unique set of circumstances, consulting with an accountant or other financial advisor can help you identify strategies that meet your personal objectives without jeopardizing your future financial well-being.
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