Page 194 - DCOM508_CORPORATE_TAX_PLANNING

Unit 8: Tax Planning for Different Organisations

8.4 Tax Planning for Company Notes

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, capitalising on company deductions and
engaging a friendly tax regime to run a business. Planning of taxes should be done in an effi cient

manner so as not to jeopardise the business goals of expansion, profits and growth. Minimising
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 organisations for expansion
of their activities. This source of increased funds can be utilised 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 equipments and selection of tax-favoured benefit plans and investments.
As we know that in corporate tax planning, companies formulate strategies that are signifi cant
in minimising 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 benefi t 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 benefi t
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
person can place pre-tax dollars into a retirement account. Having employees mean providing
for them the capability of doing the same. A company owner can also choose other employee

benefit plans to attract employees. Corporate tax planning involves looking out for employees by

offering retirement, cafeteria and medical benefit plans. Cafeteria plans allow employees to use a
portion of pre-tax income for medical or child care expenses.
There are many deductions that a company can take advantage of including start-up costs,
business trip expenses, home office use, the use of automobiles, and other assets. The costs of

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