Page 57 - DCOM508_CORPORATE_TAX_PLANNING

Corporate Tax Planning

Notes Discuss tax avoidance

Explain the concept of tax management
Introduction

Tax planning involves conceiving of and implementing various strategies in order to minimise
the amount of taxes paid for a given period. For a small business, minimising the tax liability
can provide more money for expenses, investment, or growth. In this way, tax planning can be a
source of working capital. 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. So, before one can embark on

a study of the tax planning, it is absolutely vital to understand the meaning of tax planning and
the concept of tax evasion, tax avoidance, tax planning and tax management. The purpose of this
unit is to enable the students to comprehend basic expressions. Therefore, all such basic terms are

explained and suitable illustrations are provided to define their meaning and scope.
3.1 Concept of Tax Planning

Tax planning is a broad term that is used to describe the processes utilised by individuals and
businesses to pay the taxes due to local, state, and federal tax agencies. The process includes such
elements as managing tax implications, understanding what type of expenses are tax deductible
under current regulations, and in general planning for taxes in a manner that ensures the amount
of tax due will be paid in a timely manner.

One of the main focuses of tax planning is to apply current tax laws to the revenue that is received
during a given tax period. The revenue may come from any revenue producing mechanism that
is currently in operation for the entity concerned. For individuals, this can mean income sources
such as interest accrued on bank accounts, salaries, wages and tips, bonuses, investment profi ts,

and other sources of income as currently defined by law. Businesses will consider revenue
generated from sales to customers, stock and bond issues, interest bearing bank accounts, and
any other income source that is currently considered taxable by the appropriate tax agencies.
Tax planning involves conceiving of and implementing various strategies in order to minimise
the amount of taxes paid for a given period. For a small business, minimising the tax liability
can provide more money for expenses, investment, or growth. In this way, tax planning can
be a source of working capital. Tax planning is not a device to reduce tax burden. In fact, it
helps savings by investments in government securities. Savings reduce extravagance, and

correspondingly inflation. Tax savings are permitted only for investment made in government
securities and bonds of priority sectors which ultimately help the nation. Therefore, the savings
in tax help the Central and State Governments to mobilise funds by way of investments and as
such the government earns much by way of other benefits, by sacrificing small amount of tax.

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 benefi ted.

Did u know? Basic rules applicable to tax planning:
1. Firstly, 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.

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