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Unit 10: Tax Planning for Different Organisations

11. The partnership firm is taxed as a ……………..entity. Notes
12. Under the Income Tax Act, a partnership firm may be assessed either as a partnership firm
or as an………………….

10.4 Tax Planning for Company

Section 3(1) (i) of the Companies Act, 1956 defines a company as “a company formed and
registered under this Act or an existing company”. Section 3(1) (ii) of the act states that
“an existing company means a company formed and registered under any of the previous
companies laws”. A company is a separate legal entity. As such, it is able to hold property in its
own name, sue and be sued and function separately from its owners. Individuals contribute
capital to a company and are known as shareholders. It is the shareholders in the company
directors who in turn will appoint managers for the day to day running of the business.
Tax planning is relevant in cases of surviving an audit, capitalizing on company deductions and
engaging a friendly tax regime to run a business. Planning of taxes should be done in an efficient
manner so as not to jeopardize the business goals of expansion, profits and growth. Minimizing
the tax liability can provide more funds for the company and it can especially be useful in case
of small businesses in need of more money than established firms or organizations for expansion
of their activities. This source of increased funds can be utilized for larger expenses as a form of
investment or even as a source for working capital. Deferring taxes is often a most popular way
of tax planning as it allows the company to use the money interest free and sometimes even earn
interest on the money until the next time when taxes will be due. Some of the general issues
covering tax planning are choice of accounting and inventory valuation methods, the timing of
purchase of necessary equipment and selection of tax-favoured benefit plans and investments.
As we know that in corporate tax planning, companies formulate strategies that are significant
in minimizing taxes. Some valuable ways to save include sponsoring a retirement plan, writing
off company assets, claiming depreciation expense, taking deductions on business automobiles,
office expenses, self-employment health insurance, and employer sponsored child care resources,
and using a home office for the company. Business tax planning involves understanding what it
means to be self-employed. A company owner needs to be aware of anything that might impact
taxes paid. Self-employment tax, company expenses and deductions, business assets, charitable
contributions, shifting income, and retirement planning are important considerations.
Self-employment tax is due from those who are receiving income as an independent contractor,
sole proprietor, or anyone who is conducting business through selling services or products.
Corporate tax planning provides some ways that a business owner can save on income taxes
both short-term and long-term. Income received must be reported but deductions can reduce the
amount that is actually owed. The deductions can vary depending upon the type of industry and
what are considered legitimate deductions.

Some company owners shift income to a family member as a tax advantage. In order to do this
a family member must be providing some benefit to the business and the amount should be in
line with the type of compensation. Shifting income legitimately can lower a company into a
lower tax bracket. Of course the shifting of income to a family member could raise their income
bracket and this should be considered. This is a business tax planning venture that should
benefit both parties and should be done ethically and reasonably. To shift a large amount of
income to a family member just to avoid paying taxes would be unethical unless there were a
legitimate reason such as payment for services.

A retirement plan is a tax advantage to a person who is self-employed. This can be done with or
without employees. However, it would affect the type of plan that is embraced. A self-employed

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