Page 63 - DCOM301_INCOME_TAX_LAWS_I

Income Tax Laws – I

Notes The Supreme Court in one case observed that “Tax planning may be legitimate provided it is
within the framework of Law”. By tax planning, the government is equally benefited.

Did u know? Basic rules applicable to tax planning for businesses:
1. First, a small business should never incur additional expenses only to gain a tax
deduction. While purchasing necessary equipment prior to the end of the tax year
can be a valuable tax planning strategy, making unnecessary purchases is not
recommended.
2. Second, a small business should always attempt to defer taxes when possible.
Deferring taxes enables the business to use that money interest-free, and sometimes
even earn interest on it, until the next time taxes are due.
Tax planning is an essential part of your financial planning. Efficient tax planning enables you
to reduce your tax liability to the minimum. This is done by legitimately taking advantage of all
tax exemptions, deductions rebates and allowances while ensuring that your investments are in
line with your long term goals.
In many cases, a primary goal of tax planning is to apply current laws in a manner that allows
the individual or business to reduce the amount of taxable income for the period. Thus,
planning for taxes involves knowing which types of income currently qualify for as exempt
from taxation. The process also involves understanding what types of expenses may be
legitimately considered as deductions, and what circumstances have to exist in order for the
deduction to be claimed on the tax return.

Notes There are three common approaches to tax planning for the purpose of minimizing
the tax burden.
The first is to reduce the adjusted gross income for the tax period. This is where
understanding current tax laws as they relate to allowances and exemptions come into
play.
A second approach to tax planning is to increase the amount of tax deductions. Again, this
means knowing current laws and applying them when appropriate to all usual and normal
expenses associated with the household or the business. Since these can change from one
annual period to the next, it is always a good idea to check current regulations.
One final approach that may be applicable to effective tax planning has to do with the use
of tax credits. This can include credits that relate to retirement savings plans, college
expenses, adopting children, and several other credits.
3.1.1 General Areas of Tax Planning

There are several general areas of tax planning that apply to all sorts of small businesses. These
areas include the choice of accounting and inventory-valuation methods, the timing of equipment
purchases, the spreading of business income among family members, and the selection of tax-
favoured benefit plans and investments. Some of the general taxes planning strategies are
described below:
1. Accounting Methods: Accounting methods refer to the basic rules and guidelines under
which businesses keep their financial records and prepare their financial reports.

58 LOVELY PROFESSIONAL UNIVERSITY