Page 58 - DCOM508_CORPORATE_TAX_PLANNING

Unit 3: Corporate Tax Planning

2. Secondly, a small business should always attempt to defer taxes when possible. Notes
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 minimising
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. There

are two main accounting methods used for record-keeping: the cash basis and the accrual
basis. Small business owners must decide which method to use depending on the legal
form of the business, its sales volume, whether it extends credit to customers, and the tax
requirements set forth by the Internal Revenue Service (IRS). The choice of accounting
method is an issue in tax planning, as it can affect the amount of taxes owed by a small
business in a given year.
Accounting records prepared using the cash basis recognises income and expenses

according to real-time cash flow. Income is recorded upon receipt of funds, rather than
based upon when it is actually earned, and expenses are recorded as they are paid, rather
than as they are actually incurred. Under this accounting method, therefore, it is possible
to defer taxable income by delaying billing so that payment is not received in the current

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