Tax planning is any activity designed to minimize the taxes that a business pays by reducing the amount of income subject to tax, increasing deductions, and deferring or accelerating deductions. Phoenix tax planning may involve altering business activities to minimize taxable income or increase potential deductions.
Businesses may seek to reduce their taxes by transferring income from high-tax jurisdictions to low-tax jurisdictions through foreign subsidiaries. This may involve incorporating a business in a foreign country with lower taxes or locating tangible property in another country with favorable property laws. Other techniques include companies seeking benefits from double taxation treaties, transfer pricing adjustments, and hybrid entities (a parent company and a subsidiary).
Let us now see the benefits of tax planning for businesses.
- Greater control over payments
A business can reduce its tax by making payments to the correct person or persons. This is done by the payment of wages, salaries, and royalties. When a payment is made to the right person, it reduces income, making it more difficult for tax officials to collect taxes. Some taxpayers even avoid paying certain income by making certain payments under garbled names.
- Reduction in tax rates
Businesses can contribute to a government fund by paying taxes on their profits. In some cases, the companies are taxed at a higher rate. This may be acceptable where the business is required to pay social security contributions or in other situations where tax deductions are not permitted.
- Reduction in tax bills
Businesses can reduce their tax bills by making payments under a tax-deferred plan. Under the plan, the business pays more at the end of the year than at the start. The business also reduces its taxes by making payments in installments.
- Full advantage of tax credits
A business can seek tax credits. A business can seek tax credits for environmental improvements, research and development, and training programs.
- Tax planning makes businesses more efficient and competitive
Tax planning involves finding ways to reduce the amount of money that goes to the government through taxes. This makes businesses more efficient, allowing them to grow their profits and become more competitive. Tax planning also allows a business to cut its tax bill, meaning that each dollar of profit is worth more than if taxes have been paid on it already.