Introduction

Tax planning includes devising and implementing various strategies to reduce the total amount of taxes owing over a specific period. A small business's tax burden can be reduced, which will help 

in freeing up money for spending, investing, or development. Thus, tax planning may serve as a source of working capital. For all kinds of small enterprises, there are a few general tax preparation areas. Examples of these areas include choosing accounting and inventory valuation methods; planning when to buy new equipment; allocating firm profits to family members; and choosing tax-favored investments and benefit programs.

A key component of financial planning is tax planning. It guarantees tax savings while also abiding by the rules and regulations outlined in the Income Tax Act, 1961. The basic goal of tax planning is to save money and reduce one's tax liability. However, this is not the only goal.

 

Tax Planning: An Overview

Tax planning, as defined by the Income Tax Act or other applicable tax laws, is a practice carried out by a taxpayer to reduce his tax liability by making the best use of all available exemptions, deductions, and other provisions that are permitted and reasonable. In essence, it involves looking at a financial position from a taxation perspective.

Tax planning makes sure that every element of the financial plan works in conjunction for the best possible result. Our Indian tax legislation offers several choices for taxpayers, including a variety of exemptions and deductions that help to lower overall tax liability. Sections 80C - 80U are some of the deductions available to taxpayers, and every taxpayer who qualifies can take advantage of them. Other sections of the Income Tax Act of 1961, like tax credits and deductions, might also help in lowering taxes. Let's examine the tax planning process for businesses.

Tax Planning Under Different Business Structures

At least for professionals and small business owners, the first step in tax planning is to choose the best organizational structure for their company. Numerous elements of tax planning are unique to particular kinds of organizations.

 

 A few of these are covered in more depth below.

 

●  Sole Proprietorships and Partnerships

In numerous aspects, tax planning for sole proprietorships and partnerships is comparable to personal tax planning. Small business owners submit an informative return to the IRS(Internal Revenue Services) on behalf of their firm and then subsequently report any funds obtained for their use in their tax returns. Partnerships and sole proprietorships are not permitted to withhold income taxes for themselves because they do not anticipate receiving a regular salary.

 

The tax paid in quarterly installments must equal the total amount owed for the quarter or the whole year. If you don't pay your estimated taxes on time, the IRS will levy interest in addition to a severe penalty. The IRS determines the amount owed every quarter, so making a sizable lump sum payment in the fourth quarter does not protect a taxpayer from penalties.

●  S Corporations

For the purposes of federal taxation, S corporations are those corporations that choose to pass through to their shareholders corporate income, losses, credits and deductions.. They avoid double taxation by directly transferring their profits (or losses) to shareholders rather than paying dividends. According to experts, it is frequently preferable to establish a new business as an S corporation rather than a C corporation for tax advantages. A company's first year or more of operation will typically be marked by losses.

On the other hand, individual owners frequently sell assets and cash out investments to get the capital required to launch a firm. Shareholders and workers of S corporations are only obligated to pay FICA taxes on salary income; they are exempt from paying these taxes on dividends or profits retained by the company. But it's important to know that the IRS has the authority to investigate incomes that are too low.

● C Corporations

A corporation with a C corporation legal form has shareholders who are taxed separately from the corporation.. The filing of corporate taxes is very different from that of a sole proprietorship. This is because C corporations accumulate profits rather than distributing them to individual owners or shareholders. A corporation is a legal body that was created with the intention of, and, according to the law, it is a distinct taxable organization and, based on its size, different corporate tax rates apply.

The entire amount of money you made from your efforts. Personal service businesses, like law firms and medical practices, pay a premium of 35%. In addition to the standard corporate tax, corporations may also be subject to several other special taxes. Companies are required to submit an annual corporate tax return either on a calendar-year basis or a fiscal-year basis.

 

 

Benefits Of Tax Planning

1. Minimizing legal proceedings: Dealing with municipal, federal, state, or foreign tax authorities to resolve tax disputes is known as litigation. Tax collectors and taxpayers frequently disagree because the former want to collect as much money as they can while the latter wants to have as little tax liability as feasible. The taxpayer is shielded from liability by reducing litigation.
2. To lower tax liability programs: Taxpayers want to save money for the future and pay less in taxes. By structuring your investments according to the different advantages provided by the Income Tax Act of 1961, one can lower the amount of tax that is due. The Act provides a variety of tax-planning strategies that can drastically reduce one's tax liability.
3. To maintain economic stability: Taxpayer funds are used to advance the nation's economy. Effective tax administration and planning result in a steady stream of white money, which supports the economy's sound growth. Citizens and the economy gain from this.
4. Leveraging productivity: One of the fundamental objectives of tax planning is to distribute money from taxable sources to various income-generating schemes. This guarantees the best possible use of money for worthwhile purposes. 

Use of Accounting Rules

When the assessee earns income under this head, the income is normally computed using the assessee's preferred accounting method. If the assessee uses the mercantile system of accounting, then allowable expenses and revenue that are computed on an accrual basis are eligible for deduction on an accrual basis. If he uses the cash system, income is determined based on receipts, and allowable expenses can only be written off if they were completely paid for.

 

 Purchase of Equipment

This tax cut will also benefit small businesses by increasing their deductions for business expenses, lowering their taxable income, and lowering their tax liability. At the end of the year, purchases of necessary equipment up to the limit are still fully deductible.

Methods for Inventory Valuation

Inventory valuation is important because businesses must factor in how much inventory they will have at the end of the year when determining how much they may write off for annual inventory acquisitions.

Investments and employee benefits

Payroll planning also applies to several employee benefits that may qualify as tax deductions for the employer, such as enrollment in retirement, fitness, and life programs. Many of these insurance programs are also non-taxable employee benefits.

Expenses that are Allowed as Deductions

 

 

Section No.	Name of the Section
Section 30	Rates, Rent, Taxes, Insurance, and Repairs
Section 31	Factory, equipment, and furniture, insurance and repairs
Section 32AD	Allowance for investment in a Notified Backward Area in Bihar, Andhra Pradesh, West Bengal, or Telangana
Section 32	Depreciation
Section 33ABA	Fund for Site Restoration
Section 33AB	Development Account for Rubber, Coffee, and Tea
Section 35ABA	Expenses for acquiring the right to use spectrum for telecommunications services
Section 35ABB	Expenses for obtaining a telecommunications services licence
Section 35 AD	Deduction for Expenditure on a Specified Business
Section 35CCA	Payments to organisations and institutions for implementing rural development programmes
Section 35CCC	Agricultural Extension Project Expenditure
Section 35CCD	Expenditure on project for Skill Development
Section 35DDA	Amortisation of Expenditure under Voluntary Retirement Scheme

 

 

Costs that Can Be Deducted From Business Income Under Section 37(1)

●        Expenses associated with litigation to defend a trade or company.

●        Expenditure is incurred in the interest of the assessee's company for the preservation or security of the asset or for saving such asset from loss, dissipation, or wastage.

●        Expenses incurred to protect or retain an established title of a business asset via litigation.

●        An assessee pays a company a royalty for using its logo.

●        Fees paid for consulting services related to software maintenance.

Conclusion

Tax preparation, as opposed to tax compliance or reporting, is a practice that looks ahead and takes into account the past. Corporations typically employ certified public accountants or tax attorneys to provide professional advice on this complicated subject. Corporate tax planning essentially refers to methods for reducing taxes. The management and preparation of taxes is a risky task. A primary priority is to deal with taxes in a trustworthy and efficient way. Excellent business tax planning is required to achieve a seamless process. Selecting the countries, states, and localities with the right to tax business operations is one of the most crucial components of corporate tax planning.

Since each sovereign state has its own unique set of tax rules, jurisdictional arbitrage will lead to variations in tax rates. One major source of business tax planning opportunities is choosing the optimal time frame to recognize an expense or an item of income. The time value of money causes positive cash flows and savings when income recognition is postponed to a later period or expense deductions are accelerated to the present period. It may be possible to produce timing discrepancies that result in tax benefits by strategically utilizing the gaps between the rules for book accounting and tax accounting.