- Corporate Finance
- Mutual Funds
- Investing Essentials
- Fundamental Analysis
- Portfolio Management
- Trading Essentials
- Technical Analysis
- Risk Management
- Company News
- Markets News
- Cryptocurrency News
- Personal Finance News
- Economic News
- Government News
- Wealth Management
- Budgeting/Saving
- Credit Cards
- Home Ownership
Retirement Planning
- Best Online Brokers
- Best Savings Accounts
- Best Home Warranties
- Best Credit Cards
- Best Personal Loans
- Best Student Loans
- Best Life Insurance
- Best Auto Insurance
- Practice Management
- Financial Advisor Careers
- Investopedia 100
- Portfolio Construction
- Financial Planning
- Investing for Beginners
- Become a Day Trader
- Trading for Beginners
- All Courses
- Trading Courses
- Investing Courses
- Financial Professional Courses
What Is Tax Planning?
Understanding tax planning, retirement saving strategies.
- Planning vs. Gain-Loss Harvesting
- Investing Basics
Tax Planning: What It Is, How It Works, Examples
Julia Kagan is a financial/consumer journalist and former senior editor, personal finance, of Investopedia.
:max_bytes(150000):strip_icc():format(webp)/Julia_Kagan_BW_web_ready-4-4e918378cc90496d84ee23642957234b.jpg "what is tax planning for new business")
Tax planning is the analysis of a financial situation or plan to ensure that all elements work together to allow you to pay the lowest taxes possible. A plan that minimizes how much you pay in taxes is referred to as tax efficient . Tax planning should be an essential part of an individual investor's financial plan. Reduction of tax liability and maximizing the ability to contribute to retirement plans are crucial for success.
Key Takeaways
- Tax planning is the analysis of a financial situation or plan to ensure that all elements work together to allow you to pay the lowest taxes possible.
- Considerations of tax planning include the timing of income, size, the timing of purchases, and planning for expenditures.
- Tax planning strategies can include saving for retirement in an IRA or engaging in tax gain-loss harvesting.
Tax planning covers several considerations. Considerations include timing of income, size, and timing of purchases, and planning for other expenditures. Also, the selection of investments and types of retirement plans must complement the tax filing status and deductions to create the best possible outcome.
Saving via a retirement plan is a popular way to efficiently reduce taxes. Contributing money to a traditional IRA can minimize gross income by the amount contributed. For 2022, if meeting all qualifications, a filer under age 50 can contribute a maximum of $6,000 to their IRA with an additional catch-up contribution of $1,000 if age 50 or older. That number rises to $6,500 in 2023, with the catch-up contribution holding steady at $1,000.
For example, if a 52-year-old male with an annual income of $50,000 who made a $7,000 contribution to a traditional IRA has an adjusted gross income of $43,000, the $7,000 contribution would grow tax-deferred until retirement.
There are several other retirement plans that an individual may use to help reduce tax liability. 401(k) plans are popular with larger companies that have many employees. Participants in the plan can defer income from their paycheck directly into the company’s 401(k) plan. The greatest difference is that the contribution limit dollar amount is much higher than that of an IRA.
Using the same example as above, the 52-year-old could contribute up to $27,000 into their 401(k) in 2022 (rising to $30,000 in 2023). That's because in 2022, if a person is under age 50, the salary contribution can be up to $20,500 ($22,500 for 2023), or up to $27,000 ($30,000 for 2022) if age 50 or older due to the allowed additional $6,500 catch-up contribution. The catch-up contribution for 2023 rises to $7,500.
Tax Planning vs. Tax Gain-Loss Harvesting
Tax gain-loss harvesting is another form of tax planning or management relating to investments. It is helpful because it can use a portfolio's losses to offset overall capital gains. According to the IRS, short and long-term capital losses must first be used to offset capital gains of the same type. In other words, long-term losses offset long-term gains before offsetting short-term gains. Short-term capital gains, or earnings from assets owned for less than one year, are taxed at ordinary income rates.
As of 2022, long-term capital gains are taxed as follows:
- 0% for single filers whose income is no more than $41,675 ($83,350 in the case of a joint return or widow(er), $55,800 in the case of an individual who is head of household, or $41,675 in the case of a married individual filing a separate return)
- 15% tax for single filers whose income is between $41,676 and $459,750 ($517,200 in the case of a joint return or widow(er), $488,500 in the case of an individual who is the head of a household, or $258,600 in the case of a married individual filing a separate return)
- 20% tax for those whose income is higher than listed for the 15% tax
In 2023, long-term capital gain limits will be increasing to the following:
- 0% for single filers whose income is no more than $44,625 ($89,250 in the case of a joint return or widow(er), $59,750 in the case of an individual who is head of household, $44,625 in the case of a married individual filing a separate return)
- 15% tax for single filers whose income is between $44,626 and $492,300 ($553,850 in the case of a joint return or widow(er), $523,050 in the case of an individual who is the head of a household, or $276,900 in the case of a married individual filing a separate return)
- 20% tax for those whose income is higher than that listed for the 15% tax
For example, if a single investor whose income was $100,000 had $10,000 in long-term capital gains, there would be a tax liability of $1,500. If the same investor sold underperforming investments carrying $10,000 in long-term capital losses, the losses would offset the gains, resulting in a tax liability of 0. If the same losing investment were brought back, then a minimum of 30 days would have to pass to avoid incurring a wash sale .
According to the Internal Revenue Service, "If your capital losses exceed your capital gains, the amount of the excess loss that you can claim to lower your income is the lesser of $3,000 ($1,500 if married filing separately) or your total net loss shown on (line 21) of Schedule D (Form 1040 or 1040-SR).
For example, if the 52-year-old investor had $3,000 in net capital losses for the year, the $50,000 income will be adjusted to $47,000. The remaining capital losses can be carried over with no expiration to offset future capital gains.
Internal Revenue Service. “ Retirement Topics - IRA Contribution Limits ."
Internal Revenue Service. " 401(k) Limit Increases to $22,500 for 2023, IRA Limit Rises to $6,500 ."
Internal Revenue Service. " Traditional IRAs ."
Internal Revenue Service. " Topic No. 409 Capital Gains and Losses ."
Internal Revenue Service. " Rev. Proc. 2021-45 ," Pages 8-9.
Internal Revenue Service. " Rev. Proc. 2022-38 ," Pages 8-9.
Internal Revenue Service. " Publication 550 (2021): Investment Income and Expenses ," Page 56.
- Terms of Use
- Editorial Policy
- Privacy Policy
- Do Not Sell My Personal Information
By clicking “Accept All Cookies”, you agree to the storing of cookies on your device to enhance site navigation, analyze site usage, and assist in our marketing efforts.
6 Tax Planning Strategies for New Businesses
Piyush Mohta
Updated January 11, 2023
Every Indian individual, LLPs, HUF, partnership firms, corporates, AOPs, BOIs, and the likewise are obligated to pay taxes on time.
Payment of taxes is counter-intuitive. On one hand, it reduces the take-home income as well as keeps control of the standard of living, especially on the expenses. On the other hand, it also helps the government finance its various initiatives and programmes for the people of the state. Suppose you have opened a new business in India.
In that case, it is all the more important to do tax planning for your new business thoroughly so that you reap the maximum benefits of the available tax deductions and exemptions. Before you establish and dive into your new business and its operations, it is essential as an entrepreneur to gain some clarity on tax planning. Read on to know about aspects that you should factor in if you are planning to or have just set up a new business.
Tax Planning
As mentioned, with taxes being a liability for every individual, paying taxes on time becomes critical for getting the maximum deductions. If you have started a new business in India, tax planning for business becomes essential as it will help you save significant financial resources in a way that is not only judicious and allowed but is promoted by the tax authorities themselves.
New businesses are essential for the growth, progress, and development of the country. These new businesses create further income, employment, investments, and optimal use of resources. Thus, it is equally important that these new businesses are well supported and guided. The Income Tax Act, 1961, which governs the tax rules and regulations of the country, has several such options in the form of investments, deductible expenses, turnover particulars, and many more, which can help businesses save tax while simultaneously contributing to the growth and development of the economy.
Expert recommended advice for Businesses, especially the newer ones, is to tap into the benefits of the available tax-saving option for saving financial resources during the initial period of the business. New businesses should take extra care in planning their taxes. Tax planning should ideally start from the moment a business is established.
Let us discuss in detail the meaning, significance, and various ways in which a new business can plan taxes for efficient and optimal tax savings.
Also Read: VPF Interest Rate – Voluntary Provident Fund Calculation
Understanding tax planning for businesses
Understanding tax planning for businesses is highly important as it is a critical part of financial management. Tax planning means using your resources cleverly such that the tax liability is reduced. It is systematic and strategic planning of the expenses, investments, operations, and other aspects with the purpose of reducing or minimising the tax incidence of the business.
Tax planning for businesses in India would enable the business to undergo a reduction of tax liability by utilising exemptions, tax benefits, and multiple forms of tax deductions. It is basically a financial analysis curated from the perspective of taxation.
Significance of Tax Planning in Business
If the fresh businesses or startups do not take enough care towards proper tax planning and/or pay less or no taxes to the Government of India, then the growth and development of the country gets adversely affected. The government encounters a shortfall in finances and this takes a fresh toll on the citizens.
On the other hand, strategic tax planning that makes the best use of financial resources and minimises the tax liability of the company through various types of deductions, exemptions, investments, and benefits provides financial leverage to the business as well as the government.
- A systematic tax planning ensures the smooth functioning of the business.
- Tax planning keeps the business guarded against legal mandates and hassles.
- A business can significantly reduce its tax liability using a robust tax planning strategy.The money saved on taxes could be utilised for staggering investments.
- To put it simply, tax planning helps businesses save money. At the onset of a new business, these savings can be beneficial.
- Tax planning will help businesses optimally utilise the tax credits and concessions.
These are some of the basic advantages of tax planning for new businesses . Thus, strategic tax planning for new businesses in India helps the organisation achieve a positive ROI. Therefore, all the stakeholders of the business are also satisfied.
Next, we will discuss some strategies surrounding tax planning that new businesses can engage in so that they can get the benefits of tax planning.
6 Tax Planning Strategies for New Businesses
If you are a new business in India and you wish to implement effective tax planning for companies in India, the following six strategies will help you a lot.
Choosing the right business structure
According to the Ministry of Corporate Affairs, there are different types of business entities that operate in India. For example, OPC, Pvt. Ltd., LLP, Sole Proprietorship, etc. Selecting the right business structure will help you reduce your tax liabilities and strengthen your tax planning strategies. In this way, choosing and understanding the tax liability of the business structure will help you implement effective tax planning for new businesses.
Write off initial expenses
When you start your entrepreneurial journey, there will be several associated costs with setting up the business. These initial expenditures fall under the category of ‘capital expenditure’. The capital expenditure incurred for setting up a new business can be written off as a deduction in the first 5 years, in 5 instalments, as per Section 35D of the Income Tax Act, 1961. Under Section 35D, the maximum deductible cannot exceed 5% of the project cost. An organisation’s maximum deduction cannot exceed 5% of the cost of the project or its capital invested in the business of the company.
Plan investments
Do not wait for the end of the assessment year to seep in for you to start thinking about tax-saving investments such as ELSS, PPF, tax-saver FDs, etc. Rather, check, research, plan, and stagger your investments regularly throughout the relevant financial year. This way, when you file your ITR, you will be eligible for a wide range of tax deductions and exemptions.
Claiming all possible deductions
If you are a startup and just starting as an entrepreneur, you should see to it that all your books tally and you take advantage of all deductions possible. For example, apart from claiming the deduction of the preliminary expense in accordance with section 35D of the Income Tax Act, you can also get several deductions and exemptions as outlined in Chapter VI of the Income Tax Act, based on your investments and expenses.
If you are tax planning for business in India and you declare your home to be your office, you are eligible to claim a Home Office Deduction by subtracting the relevant expenses like depreciation, electricity bills, property bills, business expenses, etc., but if you sell off the property, you might have to let go of long term capital gains tax under section 54 or 54F.
Similarly, you can claim deductions like business expenses, which are incurred while running your business, and charitable donations, which attract deductions under section 80G of the Income Tax Act.
Paying municipal taxes by cheque
Payment of municipal taxes on your office premises by cash can result in the loss of receipts. On the other hand, paying municipal taxes by cheque allows you to claim a deduction. Pro tip – if you have still paid by cash and lost the receipt, print the consolidated bank statement and show that there has been a payment of municipal tax.
Diligently record cash expenses
Although startups are flourishing in India, many of them are working in the unorganised sector where the labourers get paid in cash. Such indirect wages account for at least 40% of your functional expenses. For example, proper tax planning for business can never be implemented if in a company at least INR 50K is paid, which is not recorded or improperly recorded due to the absence of a proper register.
This results in the under-recording of expenses in a financial year by INR 180K – amounting to a flat tax rate of 30%. Keeping proper cash receipts along with signatures and thumb impressions of labourers is essential for claiming proper deductions from wages and ensures tax planning for companies in India .
In addition to the above, there are some other strategies as well. These consist of deducting tax at source. Then one can avail of a deduction for depreciation as well. Under the Income Tax Act of 35AD, if a piece of new machinery is installed in a manufacturing company, there is a provision for additional tax exemptions.
In the case where new machinery is installed in a manufacturing enterprise, in addition to the depreciation, an additional tax deduction of 20% is eligible for the machinery unit if it is put to use in the same year.
Furthermore, deducting income that is taxable under other heads or “income from other sources such as indirect income” is another strategy that new businesses can tap into. They can also claim indexation and report foreign assets, if any, – these are some of the strategies that would help in appropriate tax planning for companies in India.
Hiring the services of an expert, paying taxes in advance, investing in PPF, and various forms of insurance premiums also help in tax deductions for companies in India.
What are the strategies for tax deduction?
Some of the strategies for tax deductions are: > Utilising depreciation > Accounting method planning > Pass through entity taxes > Utilising charitable considerations > Reporting foreign assets, if any.
How hiring a professional will help me in strategising for taxes in India?
The Indian tax laws can sometimes be quite difficult to understand. There are various sections and subsections and subsections of those. If you are a novice, calculating the tax payable in India could be a hassle. That is why it is always advised to take the help of an expert or a professional.
There are multiple tricks and inroads for getting tax exemptions and deductions. There are also numerous penalties, fines, or interest for not filing or late filing of taxes. Thus, you should always get the help of an expert while filing taxes.
What is tax planning for a new business?
Tax planning for new businesses refers to a systematic financial procedure surrounding the tax provisions of the country. The primary goal of the business should be to implement it in such a way that maximum tax liability can be reduced or entirely eliminated. According to this procedure, an entrepreneur will have to look at the multiple taxation options to properly determine when and in which way the business should be conducted in order to refrain from penalties, etc.
What does tax planning in India explain?
Before going into the depths of the tax planning of companies in India, you should know the 5Ds, or the 5 pillars of income tax planning. They are – deducting, deferring, disguising, dividing, and dodging to save tax.
Now that you know that tax is a liability that should be minimised, you should understand that tax planning is the analysis of a person’s financial situation from a tax efficiency point of view so that they can plan and implement their finances in the most optimised manner.
Disclaimer: This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The article may also contain information which are the personal views/opinions of the authors. The information contained in this article is for general, educational and awareness purposes only and is not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision, whether related to investment or otherwise, taken on the basis of this article.
When Is the Best Time to Start Investing in Mutual Funds?
Vpf interest rate – voluntary provident fund calculation, leave a comment cancel reply.
Save my name, email, and website in this browser for the next time I comment.
About Wint Wealth
Through Wint Wealth, you can invest in Bonds that give better returns than FDs but are less risky than Stocks. Start Investing at just ₹10,000 & Earn 9-11% Returns.
Media & Press
Copyright © 2023 FOURDEGREEWATER CAPITAL PVT LTD All rights reserved.
7 Tax Planning Strategies for Your Small Business
Smart business tax planning can make a big difference for your company. Each of the more than 30 million small businesses in the U.S. probably has a different ideal tax planning strategy . However, there are some generally applicable approaches. Many or even most small businesses could use one or more of these to save on income taxes. If you’re a business owner looking to minimize the impact of taxes, following certain strategies can really pay off.
Do you have business financial planning questions? Speak with a financial advisor today .
1. Manage the Timing of Your Income and Expenses
One basic technique is to accelerate expenses and defer income. Business can slow income by delaying sending invoices from the fourth quarter to the first quarter. To capture expenses, they can make large purchases before year-end rather than in a few months.
The benefit is that when income is deferred to next year, taxes on that income aren’t paid until next year. Similarly, an expense taken now can be a deduction against current income instead of future income.
Ideal timing of income and expenses depends on your business’s future outlook. If you expect significantly higher personal income next year, it may save on taxes to get income now, for instance. Make these decisions with your accountant and tax advisor.
2. Make the Most of Depreciation
Depreciation is an accounting technique that lets businesses record an asset’s loss in value as an expense. This paper expense can help reduce taxable income and, therefore, taxes. Usually depreciation must be spread over years or even decades. However, federal laws allow businesses to depreciate 100% of qualified property (up to $1 million) the year it was acquired. This is true only for property that was put into service after Sep. 27, 2017 and before 2023. For property put into service in 2023 and beyond, the deduction drops to 80% of qualified property.
This first-year bonus depreciation means a business can deduct from income the entire purchase price of some types of property. Business owners need to consult a tax advisor to be sure. But computers, software, equipment, machinery, furniture, vehicles and building improvements may qualify.
3. Use the Qualified Business Income Deduction
The same law as the one above also enables a brand-new strategy that lets some businesses deduct 20% of business income. This is only available to pass-through businesses such as sole proprietorships, single-member LLCs and S corporations.
C corporations, such as Amazon and General Electric, can’t get the qualified business income deduction. They are not flow-through entities for tax purposes. A C corporation can undergo a change to an S corporation by filing IRS Form 2553. However, S corporations have restrictions on the number and type of shareholders, as well as on the type of shares they can issue. These restrictions may limit S corporation growth prospects.
There are also limits to the qualified business income deduction based on income level and business type. For instance, many service companies will not qualify based on business type. So, again, talk to your tax advisor. The qualified business income deduction will likely expire in 2025.
4. Fund Retirement Plans
Retirement plans offer tax savings for businesses just as they do for individuals. If you have no retirement plan , consider setting one up. Owners of corporations can contribute up to 25% of their salary to a tax-deferred plan like a 401(k). Sole proprietors can put up to 20% of earnings into a tax-deferred SEP-IRA account.
To get serious tax savings, consider a defined benefit plan. This is essentially a pension plan. They can let businesses put away far more in tax-deferred contributions than defined contribution plans such as IRAs and 401(k)s . The catch is that defined benefit plans are as complicated as IRAs are easy. Expert assistance is essential to set one up. And they aren’t right for all businesses.
5. Offer Employee Benefits
Employee benefits such as company-sponsored health insurance can help attract and retain talent. They can also give your business a deduction to reduce taxable income. And unlike wage hikes, adding or improving employee benefits doesn’t increase employment tax costs.
Health insurance isn’t the only option. Company contributions to benefits such as life, disability and long-term care insurance can also reduce taxable income. So can tuition assistance, childcare assistance, transportation benefits and company cafeterias.
6. Leverage Health Savings Accounts
If your health insurance plan has a high deductible, you may be able to fund a health savings account (HSA) . This is one of the most tax-advantaged ways to save. Contributions to HSAs can be deducted from current income. The contributions to the account grow tax-free. And withdrawals for qualified health expenses are also tax-free.
7. Consider Relocation
Some jurisdictions have significantly lower business taxes than others. Relocating to a state or city with lower taxes can reduce the business’s tax burden.
For instance, Wyoming and South Dakota have no individual or corporate income tax . Alaska has no state sales tax or individual income tax. Montana, New Hampshire and Oregon have no sales tax. Other states that have a business-friendly tax regime are Tennessee, Texas, Nevada and Washington.
Bottom Line
These are just a few of the more widely useful business tax planning strategies. Businesses may also be able to save on taxes by employing family members or setting up a home office. Changing your tax filing status from C corporation to S corporation can avoid double taxation. That can also possibly open the way to a qualified business income deduction.
Small Business Tips
- A financial advisor can offer specific advice for your business’ situation. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now .
- The complexity of business taxation means almost any business would do well to consider seeking expert advice. A tax accountant may charge several hundred dollars an hour for customized planning. However, a much less expensive, off-the-shelf tax return preparation software can run what-if scenarios for business owners interested in do-it-yourself tax planning.
Photo credit: ©iStock.com/Mehaniq, ©iStock.com/ronstik, ©iStock.com/designer491
- 7 Mistakes You'll Make When Hiring a Financial Advisor
- Take This Free Quiz to Get Matched With Qualified Financial Advisors
- The Best States to Retire in 2022
More From SmartAsset
- Compare Up to 3 Financial Advisors Near You
- Mortgage Calculator
- How Much Do I Need to Save for Retirement?
- Calculate Your Capital Gains Tax
- Should I Refinance My Mortgage?
- Compare Mortgage Rates
More From Forbes
14 tax-planning strategies to cut your business taxes.
- Share to Facebook
- Share to Twitter
- Share to Linkedin
Tax planning strategies to help your reduce your 2022 small business taxes
As your income grows from your small business , it can be shocking how large your tax liabilities can be each year. From State and Federal income taxes to self-employment taxes, your tax bills can be painfully large. Tax planning is an essential part of running a successful business. Keep reading for ways to minimize your small business taxes each year.
The larger your business income, the more valuable proactive tax planning can be. Most small businesses will need to utilize a number of the following tax-planning strategies.
1. Look for Ways to Reduce Your Adjusted Gross Income
I am stating the obvious here, but the first step in tax planning for your business is to look for ways to reduce your Adjusted Gross Income (AGI). I can’t tell you how often I have reviewed tax returns for high-income business owners who took practically no tax deductions against their incomes.
A lower AGI can keep your income in lower tax brackets; it can potentially help you benefit from more tax credits or avoid additional taxes like the Medicare surtax .
Some ways you can lower your AGI might fall on your personal tax returns. This includes things like itemized deductions (think mortgage deduction, property taxes, and charitable donations), individual contributions to retirement accounts and even contributions to a Health Savings Account (HSA).
Best Tax Software Of 2022
Best tax software for the self-employed of 2022, income tax calculator: estimate your taxes, 2. utilize fringe benefit plans for employees.
We have recently seen a run-up in employee wages in the US, leading to higher employment tax costs. One way to help minimize this strain on your business's budget is to utilize fringe benefits for your employees.
When you increase employees' wages, you also trigger higher employment tax costs. One way to get around that is to offer fringe benefits as part of employees' compensation.
Some tax-exempt fringe benefits you may want to consider are medical insurance, group life insurance , assistance with childcare, transportation reimbursements, employee meals or even tuition reimbursement.
Tax Planning can help you save more for retirement, helping you secure a happy and wealthy ... [+] retirement faster and easier.
3. Optimize Your Retirement Plan
Using the right retirement plan will allow for the largest pre-tax contributions. Larger contributions mean larger tax deductions, resulting in a lower overall tax bill.
The plan you set up years ago may not be optimized for where your business is today. I just spoke with a business owner with a seven-figure income still using a Traditional IRA. The $6,000 contribution was better than nothing, but not by much. By setting up a 401(k) plan and Cash Balance Plan, her contribution limits were above $600,000 for 2021.
Even if you have an existing 401(k) plan, you may benefit by amending the plan to ensure you can make the maximum contribution each year.
4. Add A Cash Balance Plan to the Mix
While a 401(k) plan will be an essential retirement-planning tool for many business owners, the Cash Balance Plan may make sense for higher-income business owners.
If you are 50 or older and earning $500,000 or more, you should seriously talk with your fiduciary tax planning Financial Planner and CPA about setting up a Cash Balance Pension plan.
Pensions are complicated to set up and run, and not all financial advisors are willing or able to set them up. Likewise, not all business owners are able or willing to contribute several hundred thousand dollars per year, regardless of how significant the tax savings may be.
5. Don't Ignore Carryover Deductions
Some years you may not be able to use certain tax deductions or credits. If you cannot use certain tax deductions in a particular year, they may be carried forward for use in a future year.
Some examples of tax deductions that you may be able to carry forward are the home office deduction, net operating losses (with some limitations), business credits and even capital losses.
6. Use Accountable Plans
If you have employees, you are likely reimbursing them for some expenses. This may include things like entertainment or even travel. Using an accountable plan allows you to reimburse employees for business expenses without reporting them as employee income. More employee income means more payroll taxes you would need to pay.
You don't have to be driving a Rolls Royce to a private plane to benefit from the automobile tax ... [+] deduction as a business owner.
7. Maximize Your Automobile Tax Deductions
I am a financial advisor in Los Angeles, where traffic tends to make it time-consuming to drive your car any distance. Pair that with many people driving expensive luxury automobiles, and many business-owner clients may benefit from deducting their actual auto expenses.
On the flip side, I know people living in other parts of the country and driving 100+ miles daily. They would likely benefit more from using the IRS mileage allowance of 62.5 cents per mile in 2022.
9. Defer Taxable Income to Future Years
If you have a record year, you may want to try and defer a bit of your income into future years. This strategy won't completely eliminate taxes, but it can help save some money here and there.
On the flip side, assuming you have a big taxable income year, you may want to prepay some expenses before the year’s end.
Hiring your family member to work in your business can have tax benefits.
10. Hire Your Family to Work in the Business
It takes a village to run a successful business. Does your spouse or your children help out in any way? Putting them on the payroll for their work could help save on taxes.
Children can work tax-free, assuming you follow IRS income tax thresholds. For extra credit, help them open a ROTH IRA with their income.
Adding your spouse to the payroll could allow for doubling your retirement plan contributions mentioned above. Likewise, it can also help increase their future Social Security benefits. The drawback is that you will owe payroll taxes on their income.
11. Are You Using the Right Business Entity?
Utilizing the right business entity (for your specific business) may significantly improve the tax efficiency of your business. Most common business entities have pros and cons (Sole Proprietor, S-Corp, LLC, Partnership). Talk with your tax planning professionals to ensure you are using the proper business structure for your business.
Working from home? You may qualify for the home office deduction.
12. Do You Qualify for the Home Office Deduction?
The COVID pandemic led to many more people working from home. If you qualify for this tax deduction, you should take it.
More on the Home Office Deduction
13. Stay current On Small Business Tax Law Changes
If you are working with a financial planner who specializes in tax planning and a CPA (or other tax professional), they can help keep you on top of relevant tax law changes that could affect your business.
You don't have to become a tax expert, but if you hear some headlines about new tax laws or major tax legislation, try and see how it may affect your taxes.
14. Consult a Tax Planner
Tax planning is not something you do once per year when filing your taxes. It is too late to take advantage of most tax-planning strategies when tax season rolls around.
Tax planning is part of being a business owner. Even if you are someone who enjoys staying up on current tax laws and loves bookkeeping, you will still benefit from working with a tax-planning expert.
Knowing tax law at a high level and filing your business taxes are very different things. The cost of a mistake can be astronomically high, in both extra taxes and penalties.
- Editorial Standards
- Reprints & Permissions
Please enable JavaScript in your web browser; otherwise some parts of this site might not work properly.
An official website of the United States government
Official websites use .gov A .gov website belongs to an official government organization in the United States.
Secure .gov websites use HTTPS A lock ( Lock A locked padlock ) or https:// means you’ve safely connected to the .gov website. Share sensitive information only on official, secure websites.
Visit the next version of USA.gov and let us know what you think.
Small Business Tax Information
Learn about business taxes and incentives.
On This Page
Business taxes, estimated taxes, energy tax incentives, tax relief in disaster situations, federal tax deductions for small business charitable donations.
As a business owner, it’s important to understand your federal, state, and local tax requirements. This will help you file your taxes accurately and make payments on time. The business structure you choose when starting a business will determine what taxes you’ll pay and how you pay them.
Employer Identification Number (EIN)
Most businesses need an Employer Identification Number (EIN). Your EIN is your federal tax ID number. You should get one right after you register your new business.
Find out from the IRS if you need an EIN , how to get one, what to do if you've lost or misplaced yours, and more.
Most businesses must file and pay federal taxes on any income earned or received during the year. Partnerships, however, file an annual information return but don't pay income taxes. Instead, each partner reports their share of the partnership's profits or losses on their individual tax return.
Almost every state imposes a business or corporate income tax. However, each state and locality has its own tax laws. Find out the business income tax requirements in your state or territory .
Self-Employment Tax
If you have your own business, you must pay Social Security and Medicare taxes. Otherwise, you won't be covered under the Social Security system. Learn about who must pay self-employment tax and how to pay it .
Employment Taxes
If you have employees, there are federal tax requirements for what you must pay and the forms you have to file. These employment taxes include:
- Social Security and Medicare taxes
- Federal income tax withholding
- Federal unemployment (FUTA) tax
FUTA ensures that people can receive unemployment benefits after losing a job.
Businesses in all states pay state workers’ compensation insurance and unemployment insurance taxes.
The federal government taxes businesses that manufacture or sell certain products. If your business uses various types of equipment, facilities, or other products, you may need to pay an excise tax. Learn about federal excise tax requirements and the forms you must file .
Property Tax
Each state has a different definition of what property is taxable. Some states collect property tax from businesses in commercial real estate locations. Others collect property tax for vehicles, computer equipment, and other business assets. The amount of tax you pay is calculated by the total value of the property or on a certain percentage of the value. Search for property tax requirements in your state .
Sales and Use Tax
States may tax the sale of goods and services. Check whether your business has to register to pay and/or collect sales tax in your state . Exclusions in sales tax often include food, clothing, medicine, newspapers, and utilities.
States may also tax your business on the use of goods and services when sales tax has not been collected. This typically applies to goods and services purchased outside of the state where you conduct business.
Estimated Tax
You must pay federal tax on income that is not subject to withholding. Or if the amount of your federal income tax being withheld is not enough to cover the taxes you owe, you must pay an estimated tax. Find out if your business has to pay estimated taxes and the steps to follow .
Estimated tax is the method used to pay taxes on income that is not subject to withholding. This includes income from self-employment, interest, and dividends. You may also have to pay estimated tax if the amount of income tax being withheld from your salary, pension, or other income is not enough.
Who has to pay estimated taxes?
Individuals who run their own businesses typically have to make estimated tax payments. If you don't pay enough income tax through withholding or estimated taxes, you may be charged a penalty .
Find out if you have to make estimated tax payments and how to pay .
When are estimated taxes due?
The year is divided into four periods to pay estimated tax. Each period has a specific payment deadline, typically:
- April 15
- September 15
- January 15 of the next year
Energy-related tax incentives can make home and business energy improvements more affordable. There are credits for buying energy efficient appliances and for making energy-saving improvements.
Find out if you qualify for state, local, utility, or federal incentives.
Energy Tax Breaks by State
- Find programs and policies in your state that support renewable energy and energy efficiency. Search the Database of State Incentives for Renewables and Efficiency (DSIRE) .
- Find out if your state offers a sales tax holiday on energy-efficient home appliances.
Energy-Saving Home Improvements
Residential Energy Credits allow savings for any of these purchases for your home. These tax credits are valid through 2023:
- Solar panels
- Solar water heaters
- Small wind turbines
- Geothermal heat pumps
- Fuel-cell equipment
Energy tax incentives for biodiesel and renewable diesel extended through 2024.
The Internal Revenue Service (IRS) offers special tax help to individuals and businesses hurt by a major disaster or emergency.
Get Your Tax Refund Faster After a Disaster
In a federally declared disaster area , you can get a faster refund by filing an amended return . You will need to claim the disaster-related losses on your tax return for the previous year.
Get guidance from the IRS on amending a tax return or filing an extension after a disaster .
Tax Relief for Recent Disasters
Get a list of the most recent disasters which may be eligible for tax relief .
Find More Resources About Taxes and Disasters
The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that connects taxpayers with tax-related resources.
Learn more about preparing for and what to do after a disaster, including:
Finding the latest tax information related to recent disasters
Keeping tax records safe and documenting assets before a disaster
Restoring tax records if they were lost or destroyed in a disaster
Small businesses can receive a tax deduction for making a charitable donation . The IRS has specific reporting requirements when a small business donates:
- Non-food inventory
- Intellectual property
You won't receive a tax deduction for donating services. But you may be able to deduct expenses related to the donation, like travel or materials.
Do you have a question?
Ask a real person any government-related question for free. They'll get you the answer or let you know where to find it.
- Talk to a live USA.gov agent
- Web Chat with a live USA.gov agent
Last Updated: January 19, 2023
Contributor,
Darin Wickens
Strategic Tax Planning for Business (with Tips and Examples)
“If you fail to plan, you are planning to fail” – Benjamin Franklin. Failing to develop and implement a great strategic tax plan for business is a sure-fire way to overpay taxes. So why do so many business owners and their accountants neglect tax planning?
Here’s everything you need to uncomplicate the strategic tax planning process and the steps you can take to create a tax-optimized business strategy .
Table of Contents
What is strategic tax planning for business?
Importance of tax planning for your business, the current state of tax planning and advisory, save taxes by being proactive—not reactive, is tax planning worth the extra cost, tax minimization, tax evasion, tax avoidance.
- Business entity structure
- Tax filing status
- Asset location
- Tax-loss harvesting
- Income shifting
- Capital gains harvesting
- Charitable giving
- Get organized
- Understand your tax obligations
- Know your deductions and credits
- Choose the best strategic tax and accounting method: cash or accrual
- Use tax planning software
- Stay up-to-date with tax law changes
- Work with a tax planning professional
How Tax Hive can help
Tax planning without the stress.
“If you fail to plan, you are planning to fail” – Benjamin Franklin. Failing to develop and implement a great strategic tax plan for business is a sure-fire way to overpay taxes. So why do so many business owners and their accountants neglect tax planning?
As a business owner, you juggle many priorities. You probably have strategic initiatives to increase sales and reduce costs. But far too many overlook what likely is their most significant expense (and opportunity): Taxes.
If you’re burying your head in the sand and only thinking about taxes when you’re forced to – during “tax time” or when making quarterly payments, you’re almost certainly paying too much in taxes.
We understand taxes can be complicated and overwhelming at times. The tax code is thousands of pages long and isn’t the easiest to understand. Combining this with the reality that many taxpayers are terrified of an audit, we know the anxiety and why you might naturally avoid thinking about taxes.
Here’s everything you need to uncomplicate the strategic tax planning process and the steps you can take to create a tax-optimized business strategy .
Strategic tax planning involves looking forward one, five, 10, or 20 years rather than looking back at the past year (which is tax preparation in a nutshell). When you plan, consider what you can do to pay the lowest tax possible while arranging some of your savings to generate a tax-free income.
Here’s an example: If you had an extra $35,000 in income every year, but that income was taxed at a combined federal and state rate of 30%, you would be left with $24,500. You could turn a loss of $10,500 into a gain through careful tax planning. You could invest that money in a laddered bond portfolio or a well-structured low-cost indexed life policy that offers tax-free distributions, for example.
Tax planning allows you to use different tax exemptions, deductions, credits, and available benefits to minimize how much tax you owe, legally and morally. That’s more money you can put towards other financial goals like advertising campaigns, capital investments, employee bonuses, or even personal financial goals like paying down a house, saving for retirement, or taking a vacation. It also gives you a snapshot of your finances and taxes at the beginning of the fiscal year instead of leaving it to the eleventh hour.
It can be helpful to think of tax planning in terms of your favorite sporting activity. In basketball, for example, you have rules, time restrictions, and referees. You also have a coach, teammates, and plays you’ve drawn up and practiced together. Waiting until the third or fourth quarter usually won’t win you the game – the preparation, planning, practice, and in-game adjustments win the game.
When you own a business, paying taxes is your obligation. However, you should never be surprised by how much you owe. Understanding how business taxes work and calculating how much you have to pay every quarter or year is essential to ensuring you have enough money or a surplus to spend elsewhere in the business.
When you invest in tax planning, you accomplish a few things. First, you lower the risk of making inaccurate tax estimates. Second, you reduce the risk of forgetting to file and pay taxes on time, leading to unnecessary fees and other penalties. And last but not least, tax planning can help you find money in tax deductions, credits, or other areas you otherwise may miss entirely.
Other benefits of tax planning include:
- Lower tax rate: It may be possible to lower your effective tax rate and reduce your tax burden using strategies that aren’t widely known.
- Reduce taxable income: Reduce the amount of income that gets taxed, with or without a change in the tax rate.
- Flexibility in paying taxes: Manage cash flow and minimize unnecessary fees and penalties by scheduling quarterly estimated taxes.
- Tax credits: Take advantage of tax credits that benefit your business and reduce your overall tax bill.
The reality is that business taxes can be complicated. Plus, tax laws often change over time and from one region to another, and many regulations apply selectively to certain scenarios and business types.
If you hire a trusted financial adviser who is well-versed in tax strategies, that person will be able to flag any most relevant updates to your business. The more legal loopholes they can find, the more you’ll be able to save, so it’s important to consider getting help here.
With new U.S. tax legislation, as well as the impact of the pandemic on businesses, tax planning has become an essential tool to boost a business’s bottom line.
However, many tax accountants don’t currently offer tax planning as a service.
A 2021 Tax Planning and Advisory Insights survey by Intuit Accountants showed that only 1 in 3 clients currently receive tax planning and advisory services.
So, why the low numbers? If tax planning is critical to optimizing your tax situation and saving as much money as possible, why aren’t most accountants doing it? For the most part, it’s just basic economics – they have a finite amount of time and other limited resources.
And for the tax professionals who provide tax planning services, they’re billing up to five times the cost of basic tax preparation.
In addition to cost alone, tax planning requires specialized knowledge of the tax code and the ins and outs of the 1,400 plus tax deductions and credits. It’s incredibly time-consuming, with several hours spent preparing a “typical” tax plan.
But as clients become savvier about the needs of their business, the demand for tax planning is growing, and tax professionals are taking note. Many tax professionals are strongly considering adding tax advisory as a service.
Many small business owners are familiar with reactive tax planning. You monitor your sales throughout the year and keep your expenses under control, so you don’t break the bank. And at the end of the year (or quarter), you crunch these numbers to figure out how much you owe in taxes.
While reactive tax planning can help your business reduce its taxes, it isn’t the most effective method for your business. It can lead to a last-minute rush where you miss additional deductions and certain credit benefits. You also risk bringing in an advisor who isn’t familiar with your business’s financial picture over the previous year, putting the onus on you to ask the right questions.
You’ll succeed better if you ditch this method and consider proactive tax planning.
Proactive tax planning is strategic tax planning for business. It gives you more freedom throughout the year and at tax time. It’s also key to making your business more profitable and growing your wealth in the long term. It works by looking at state and federal tax laws ahead of time and working within them, curbing your tax liability at the end of the year.
Enlisting professional advisory services (such as Tax Hive) and communicating with one of our tax pros is key to getting the most out of proactive tax planning. We work closely with you to ensure we don’t miss valuable strategies or other ways to make your business more tax-efficient.
Paying an additional cost when trying to reduce your overall expenses may not be an attractive option at first glance—but it’s important to note that tax planning is an investment .
As mentioned earlier, tax planning and advisory services may cost you more than basic tax preparation. However, the result can far outweigh the initial cost. For instance, an internal study of more than 20,000 business owners by Tax Hive found that business owners are missing over $60,000 in potential business tax deductions.
Tax minimization, tax evasion, and tax avoidance: the differences explained
There are three basic strategies to lower the amount you pay Uncle Sam each year — tax minimization, tax avoidance, and tax evasion. Two are entirely legal, but practicing one of them could land you behind bars.
Tax minimization is 100% legal. You use the most tax-efficient methods to get long-term benefits for you and your business. It involves income shifting, entity structuring, tax deductions and credits, writing off appropriate expenses, or taking advantage of benefits through health insurance and retirement plans. It’s a way to optimize your business—before tax season starts.
If you’ve watched legal dramas or gangster films, there’s a good chance you’ve heard of the term “tax evasion.” Tax evasion is an illegal practice where taxpayers don’t accurately report their total income earned to avoid paying higher taxes. Evasion could include underreporting sales, claiming inflated or unwarranted deductions, forging documents, and transferring illegal assets. A form of tax fraud, tax evasion is a serious crime that can lead to hefty fines and even jail time.
While tax evasion is against the law, tax avoidance is a way to reduce your tax liability legally. Avoidance could include decreasing business expenses, maximizing tax credits, taking advantage of loopholes, or deferring the payment of taxes with a pre-determined plan. It’s important to note any tactics used to avoid taxes must fall within the framework of the law. That said, it’s a good idea to seek the advice of a tax expert or attorney to ensure you haven’t crossed over into tax evasion territory.
Common business tax planning strategies
1. business entity structure.
Each business entity and structure has its tax benefits and drawbacks.
Let’s look at sole proprietorship, for example. It’s the most common type of business in the U.S., representing 73 percent of all businesses . While sole proprietorships are easy to start and inexpensive to operate, they’re generally not the best business structure for many things, like limiting personal liability or reducing taxes.
Sole proprietorships generally aren’t great for reducing taxes because your business and personal income aren’t taxed as separate entities. Instead, they’re considered “pass-through” entities. This means your business income and expenses are passed onto you, the business owner, and recorded on your individual income tax return. So, your business ends up contributing to higher overall income, potentially raising your all-in tax rate for both personal and business, depending on your income bracket.
Incorporating can potentially reduce your tax liability. For one reason, the Tax Cuts and Jobs Act lowered the corporate tax rate to 21% in 2017. You can also save on self-employment taxes with the proper tax filing election (e.g., S-Corporation election). But that doesn’t mean it’s the best move for everyone.
The cost of incorporation can get pricey and comes with strict reporting requirements, which can add a pile of paperwork to your to-do list.
Whether a C corporation , partnership , or limited liability company (LLC) , switching to another entity type can significantly impact how much you might pay (or save) in taxes. Talking through your options with a tax professional—or your in-house Tax Hive advisor—can help you evaluate your choices and what structure might best suit your tax needs. It’s valuable to consider your tax filing status before you set up a formal business entity.
2. Tax filing status
Your filing status determines your filing requirements, standard deduction, eligibility for certain credits, and your correct tax. If more than one filing status applies to you, the IRS has an online questionnaire you can do to help you choose the one that’ll get you the lowest amount of tax.
The type of business and how you structure your business largely determine the tax return you need to file. If your business is a sole proprietorship, you report your business income on the Schedule C (Form 1040) income tax form. For a partnership, report your expenses, losses, and income on Form 1065 .
If you own a single-member LLC, the IRS treats you as a sole proprietor, so you’ll use Form 1040 , Schedule C, E, or F. If the only member of the LLC is a corporation, report the LLC income plus expenses on the corporation’s return on Form 1120 .
Depending on your business structure, you may qualify to file your corporate taxes as an S Corporation (also known as S-Corp or S Corp). An S Corporation is not a business structure. Instead, an S Corp is a tax filing status that allows your business to pass corporate income and expenses to shareholders for tax purposes.
Operating a corporation and LLC but filing taxes as an S Corporation can bypass double taxation and significantly reduce your self-employment taxes. You should work closely with a tax professional, accountant, or attorney to evaluate eligibility, deadlines, and requirements. You can read more about Form 2553 from the IRS. When you file taxes as an S Corporation, you’ll use Form 1120-S .
3. Asset location
Organizing your assets through asset location is key to dramatically reducing taxes in your portfolio and enhancing the tax efficiency of your investments.
Asset location focuses on where to strategically invest your money to maximize your return on investment after-tax rather than how to invest. Don’t confuse it with asset allocation , which is how you mix and distribute your assets within a given account.
Generally, you’ve got three types of accounts for investing and saving, each with different tax treatments: tax-advantaged, tax-free, or taxable accounts.
- A tax-advantaged account is a kind of savings plan or financial account where you get a tax benefit such as tax deferral or tax exemption. This account is famous for retirement savings, education expense savings, and savings for healthcare expenses. Investment examples within a tax-advantaged account include stocks, actively managed funds, mutual funds, high-yield bonds, REITs, and annuities.
- A tax-free account lets you save with after-tax dollars. You don’t escape taxation entirely since you’re using the money you’ve already paid taxes on. But when you make qualified withdrawals, you pay no additional income tax–not even on your investment growth. Some tax-free accounts include Roth IRAs, Roth 401(k)s, and Roth 403(b)s.
- With a taxable account , there’s a downside: You don’t get a tax deduction for the money you put in, unlike a 401(k) or a traditional IRA. And you don’t get to duck paying taxes when you take cash out like you can with a Roth. Instead, you must pay capital gains tax on the earnings from your investments when you sell them. On the upside, a taxable account doesn’t put a ceiling on your contribution amounts like tax-deferred and tax-free accounts do.
When allocating your growth assets (like stocks) across the different account types, you should consider these factors:
- The tax efficiency of assets (What kind of gains do they make? Long-term, short-term, or ordinary?)
- The management style of assets (Do you manage assets passively or actively?)
- Client profile (age, time horizon, tax bracket, taxable income level, liquidity needs, and estate planning needs)
4. Tax-loss harvesting
It’s bad news when you lose money on your investments, right? Watching your portfolio shrink in a bear market can be downright painful. But a reasonably simple tax-loss harvesting strategy can help turn that pain into a tax advantage.
Tax-loss harvesting (also called tax-loss selling) happens when you sell an investment that has dropped in value below what you paid, triggering a capital loss.
You then use the proceeds of the sale to buy a comparable investment (in the same sector, for instance) while the market is still down, hoping it will increase in value over time and deliver a capital gain.
You then apply your capital loss to your capital gain, and presto! Tax savings.
Why not sit on your original investment until the price recovers and even jumps above your purchase price? Because you’d still have a capital gain, but you wouldn’t have a capital loss to offset it.
And if you sold low but didn’t jump back into the market, you’d miss the chance to squeeze some value from your capital loss. Because you don’t pay tax on capital gains inside registered accounts, tax-loss harvesting only works for taxable, non-registered investment accounts.
5. Income shifting
Income shifting is moving unearned income from someone in a higher tax bracket to someone in a lower tax bracket. It aims to save tax by moving investment or business income off your tax bill to a retired parent or child, for example.
You can do this in a few ways. One is to hire, say, your 18-year-old son, to work at your business. You get a business deduction for their wages, and your son pays less tax on that money than you would have. If you have a sole proprietorship or partnership and hire a child under 18 to work for you, your child doesn’t have to pay Social Security or Medicare taxes.
It’s a bonus that you’re already supporting your child, so why not get a tax break? You may not control what your child spends their wages on, but you can agree that a share of it can go towards an investment like their college fund.
The IRS knows people will go to tremendous lengths to outwit them, so they’ve put a lot of rules and limits on income shifting. If you hire your child, it has to be a real job, paid at the going rate, and you should have proof of the work.
There are also rules about what kinds of assets you can transfer, how old a child must be to accept the transfer, and a ceiling on the amount transferred before it triggers the gift tax. Talk to your accountant to ensure you’re doing it by the book.
6. Capital gains harvesting
Capital gains harvesting is strategically selling your winning investments to reduce current and future taxes and create a more balanced portfolio. How does it work? Capital-gain harvesting offers investors the chance to achieve long-term capital gains with little or no impact on their taxes. It can work in three ways:
- If you have a fluctuating income (you’re self-employed, work part-time, or on sabbatical) and know it’s going to be a lean year, it’s an excellent time to sell your high-performing assets, realize your gains and pay lower tax on them than you would in a high-income year.
- If you have losses elsewhere in your portfolio, you can use them to cancel out any tax you might owe on your gains.
- If a particular class of assets is performing very well for you, its value in proportion to your entire portfolio won’t line up with the asset mix you want to maintain. So, selling some high-performing assets and using that money to buy lower-performing assets “on-sale” will let you put your portfolio back into balance.
But we know the IRS doesn’t make it too easy to avoid paying taxes. They’ve created some rules about capital gains harvesting, too. For instance, you must own an asset for at least a year to qualify for the tax rate for long-term capital gains (which is lower than the regular capital gains tax rate).
And selling your assets may put you on the hook for net investment income tax or alternative minimum tax. Again, your accountant or financial advisor can help you avoid these pitfalls.
7. Charitable giving
Whether you’re sponsoring your local Little League team, creating an endowment at your alma mater, or doing something in between, your charitable giving can benefit your small business’s bottom line and your community.
Like all the tax breaks we’ve discussed, there are limits on how much money you can donate during any given tax year. As an individual, you can donate and write off up to 100% of your taxable income, while your business can donate and write off up to 25% of its taxable income.
If you take the standard deduction (as most people do), you may not see an additional tax benefit for your giving. Don’t let this stop you from making a charitable donation.
Here’s one way to give strategically to maximize your deduction: Instead of making donations below the standard deduction for several years, cluster them in one year. That way, the total you give exceeds the standard deduction, and you get a better tax break. Depending on how much you donate, you can do this by giving every other year or even every third year.
Another popular way to make the most of your charitable donations is a donor-advised fund. Donor-advised funds let you make charitable contributions and get your tax deduction immediately. You can put several years’ worth of donations into the fund, take the full deduction for that year, and then decide how, where, and when to hand out your money in the following years.
7 tips to help with successful tax planning
As you get started with tax planning, here are seven things you can do to streamline the process.
1. Get organized
It can be easy to throw away receipts or forget to keep track of smaller expenses, but for tax purposes, it’s best to keep as many records as possible. Any tax-planning advisor will ask you for details and records of all your accounts. But even if you’re not working with one, it’s your responsibility to keep track of all financial aspects of your business. By doing so, you can customize tax strategies to their needs.
2. Understand your tax obligations
A basic understanding of federal, state, and local tax regulations can help you avoid paying too much in taxes and protect you from the risk of paying too little. Also, with some knowledge of tax-related topics, you’ll be able to identify potential tax benefits (and tax traps) in time to do something about them. Even if you believe no taxes are due, you’re still responsible for filing the return.
The IRS provides a list of due dates and directions for filing your taxes. That said, we strongly recommend hiring an accountant to set up your tax filings and payment schedule. Missing a due date, not paying the taxes owed, or not filing at all could raise flags with the IRS. You could face potential IRS scrutiny, fines, tax penalties, and interest.
3. Know your deductions and credits
The answer to having the lowest tax bill is not leaving a single tax credit or deduction on the table. Both reduce your tax bill, but in separate ways. Knowing the difference allows you to work out some very effective tax strategies.
A tax deduction reduces your taxable income and is taxed at a certain percentage based on your bracket. Basically, only a specific rate of every dollar you deduct gets taken off your income tax.
For example, if your tax rate is 10%, one dollar of deductions will give you 10 cents of tax savings. With a 24% tax rate, one dollar will save you 24 cents.
Operating expenses are a good example of tax deductions as they allow you to deduct any reasonable expense you incur to earn income, including any tax paid on that expense. This includes things like bad debts, business insurance, education, marketing costs, work-related travel expenses, and office supplies.
A tax credit , on the other hand, decreases your taxes directly by reducing the income tax you owe dollar for dollar. A few credits are refundable, which means if you owe $250 in taxes but qualify for a $1,000 credit, you’ll get a refund for the remainder of $750. (Most tax credits, though, aren’t refundable.)
There are hundreds of credits and deductions out there. Here’s a list of common ones that will help you get a larger tax return.
Further reading: Self Employed Tax Deduction Cheat Sheet
4. Choose the best strategic tax and accounting method: cash or accrual
Which strategic and accounting method should you use? It depends on the timing of when you reflect sales and purchases in your books.
Cash accounting identifies expenses and revenue only when cash changes hands. It’s used mainly by small businesses and sole proprietors with no inventory.
Accrual accounting reports revenue when a business earns money (e.g., when a project is complete) and expenses when billed (e.g., when you receive an invoice) but not yet paid. According to the IRS, corporations (other than an S corp) with gross receipts averaging over $25 million for the last three years must use the accrual method.
Your choice will make a difference in how your company schedules tax payments.
With the cash method, taxes are not paid on money you haven’t yet received. With the accrual method, taxes are paid on money that you’re still owed.
5. Use tax planning software
With technology continuously evolving, it’s now easier than ever to file your taxes using the software. Tax software allows you to prepare your taxes quickly and efficiently, making tax refunds you deserve easier to get.
As a small business owner, you know how crucial accurate record-keeping is for your company’s success. Platforms like Holistiplan, Tax Planner Pro, and TaxWise can save you time, maintain precise bookkeeping records, reduce errors, and automatically create reports that’ll help you understand your business finances and help you complete your taxes in less time. You can file documents in one place and organize your records year-round with just a few clicks.
You can also plan out how much tax is due, determine what deductions you can claim for your business, and see where you must comply with government regulations and rules. Not being organized could leave you paying far more taxes than you need to.
6. Stay up-to-date with tax law changes
With the U.S. tax law constantly changing (even more so since the pandemic), keeping up with the latest IRS rules and regulations can be a superhuman feat.
Having a tax plan helps you understand what’s changed and lets you reassess your strategy when needed. By understanding current tax laws, you won’t risk noncompliance with new or updated regulations, and your tax return will contain fewer errors. You’re then less likely to face an audit or have to pay more money down the line.
Here are some significant tax changes for the 2022 tax year.
Working with an accountant can ensure you comply with current regulations and pay the right amount.
7. Work with a tax planning professional
There’s nothing fun about paying taxes, so coughing up high fees to handle your taxes can exacerbate an otherwise unpleasant situation. On the other hand, preparing your tax return can be risky. It can cost you thousands of dollars in overpaid taxes, fines, and penalties because of overlooked deductions and simple mistakes.
For that reason, many small business owners hire a CPA, accountant, tax attorney, or a specialized tax professional with a proactive approach to tax planning to take care of their taxes and provide other accounting and business advice. As we discussed above, many CPAs, accountants, and tax preparers don’t provide proactive, comprehensive tax planning.
Tax planning services may cost more initially, but they can help your small business grow by providing advice on short-term and long-term tax-saving opportunities.
If you’re still in the process of hiring an accountant, bookkeeper, and tax advisor for your small business but need help with your tax-saving plan today, Tax Hive will pair you with an experienced accountant to help evaluate your needs and execute an optimized tax plan . Our tax-slashing technology and tax experts look at over 1,400 federal, state, and local deductions as they review your unique situation.
Even after building your plan, Tax Hive professionals are always available to answer questions, address concerns, and make appropriate adjustments. They’ll also ensure you’re ready come tax time with a year-end financial plan, including all the information you need to file—our tax team can even file your taxes for you.
Do you have a CPA, accountant, or tax prep firm you already like? No problem. Simply take our plan to them to implement on your behalf.
A well-implemented strategy allows you to execute a tax plan tailored to your business and its needs. Tax season and financial planning are much more effective and less stressful when you have a solid plan. Doing so is a step in getting ahead of your competitors, allocating more money towards business growth, and ultimately lowering your taxes.
Sign up for our FREE weekly newsletter to help you DRIVE MORE MONEY INTO YOUR BUSINESS IN 2023 & Kevin O'Leary's new eBook: "Digital Pivot or Bust"
*By filling out the Form above, you agree to the Terms of Use and Privacy Policy , and includes your authorization to receive calls, pre-recorded messages, or text messages using automated technology, including automatic telephone dialing systems, at the number provided. Consent is not a condition of purchase. Reply STOP to end text messages. Normal cell phone charges may apply.
YOU'RE ALL SIGNED UP!
Please check your inbox for our confirmation email and your free eBook.
- Skip to primary navigation
- Skip to main content
- Skip to primary sidebar
- Skip to footer
Tax Planning
Tax Planning Meaning
Tax planning or analysis is a lawful method to reduce tax liabilities over a calendar year by capitalizing on tax deductions, benefits, and exemptions. It assists the taxpayers in obtaining commercial security and retirement savings with the decreased fiscal burden. Nevertheless, tax planning for individuals does not include tax avoidance or tax evasion.
You are free to use this image on your website, templates, etc., Please provide us with an attribution link How to Provide Attribution? Article Link to be Hyperlinked For eg: Source: Tax Planning (wallstreetmojo.com)
This certainly aids in the proper usage of full benefit via all favorable tax law provisions. Moreover, it has three types, i.e., purposive, permissive, and short and long-range tax analysis.
Key Takeaways
- Tax planning is a legal approach to lowering the tax burden through tax benefits, deductions, and exemptions. It has three types, i.e., permissive, purposive, and short and long-range.
- It assists the taxpayers in obtaining tax efficiency by adequately planning their expenses and accumulating retirement savings.
- The tax analysis strategies incorporate broadening the outlook, making annual affordable commitments, and evaluating post-tax returns.
- The objectives of tax analysis are decreased litigation, financial stability, economic expansion, lesser total tax burden, and profitable investment.
Tax Planning Explained
TTax planning implies evaluating the taxpayer’s financial condition and conceiving approaches to surge tax efficiency ethically, both in corporate and non-commercial industries. This certainly helps them plan their capital budget Capital Budget Capital budgeting is the planning process for the long-term investment that determines whether the projects are fruitful for the business and will provide the required returns in the future years or not. It is essential because capital expenditure requires a considerable amount of funds. read more and expenditures better.
It is completely legitimate if tax planning for retirement is executed according to the regulatory framework and also helps save one’s inheritance. Nonetheless, utilizing questionable strategies like tax evasion Tax Evasion Tax Evasion is an illegal act in which the taxpayers deliberately misreport their financial affairs to reduce or evade the actual tax liability. This includes using multiple financial ledgers, hiding or representing lesser income, gains, or profits than actually earned, overstating deductions, & failing to file returns. read more is strongly discouraged and is liable to litigation. It has two major categories, namely, Corporate and Inheritance tax analysis.
Here, corporate tax planning refers to the cutback of the tax burden on a registered firm through employee health insurance, business transport, retirement planning, office expenses, etc. Contrastingly, Inheritance tax planning implicates the procedure of passing on the earnings of an estate to the selected beneficiary.
Corporate tax planning aids in decreasing direct and indirect tax liabilities during inflation. Conversely, inheritance tax planning lets the individuals draft a tax-efficient will so that the heirs can live a stress-free life.
Simply put, adequate corporate or uncommercial tax planning for individuals is an outcome of:
- Attentiveness concerning court judgments and relevant tax laws
- Reporting of accurate details to pertinent IT divisions
- Flexible analysis to include potential forthcoming changes
- Incorporation of legalized tactics and not tax avoidance Tax Avoidance Tax avoidance is the process of reducing the income tax liability of an individual or firm by adopting the lawful methods. The taxpayers can claim exemptions and deductions as allowed under the nation's tax provisions. Such as investments in municipal bonds and deductions for business loss. read more or evasion.
Types Of Tax Planning
To clarify, there are three types of tax planning for individuals:
- Purposive: It indicates the planning of taxes with a specific aim.
- Permissive: This type of tax analysis is performed as per the regulations of the nation’s taxation laws.
- Long-Range And Short-Range: Here, long and short-range tax planning for retirement is conceptualized at the beginning and end of a financial year, respectively.
Tax Planning Strategies
Now, let’s explore a few smart tax analysis strategies:
#1 – Make Inexpensive Yearly Commitments
As lucrative as it may sound, every insurance scheme is not worth the investment. Hence, taxpayers Taxpayers A taxpayer is a person or a corporation who has to pay tax to the government based on their income, and in the technical sense, they are liable for, or subject to or obligated to pay tax to the government based on the country’s tax laws. read more must only put their finances into a product or service that is both cheap and profitable in the long run. They must check their available funds to examine their affordability to retain the investment.
#2 – Analyze Post Tax Returns
While evaluating the tax returns, taxpayers must not let the profitable-yet-suspicious policies distract them. Please note that comprehending tax implications is of paramount importance. Rather, they must check out products with tax-free profits like Public Provident Fund (PPF) and Mutual funds Mutual Funds A mutual fund is a professionally managed investment product in which a pool of money from a group of investors is invested across assets such as equities, bonds, etc read more .
#3 – Broaden The Outlook
Taxpayers must channel their annual returns Annual Returns The annual return is the income generated on an investment during a year as a percentage of the capital invested and is calculated using the geometric average. This return provides details about the compounded return earned yearly and compares the returns supplied by various investments like stocks, bonds, derivatives, mutual funds, etc. read more into policies with long-term benefits. For instance, investing in long-term debt instruments Debt Instruments Debt instruments provide finance for the company's growth, investments, and future planning and agree to repay the same within the stipulated time. Long-term instruments include debentures, bonds, GDRs from foreign investors. Short-term instruments include working capital loans, short-term loans. read more assists them in leveraging the offered withdrawal alternatives. Then, they may reinvest the collected maximum tax-free capital amount in a financial vehicle like Equity Linked Savings Scheme (ELSS).
For better understanding, here are some examples.
Davina is the owner of a multinational toy manufacturing firm. First, she assesses the taxable aspects of her annual income ($20000) and computes the payable tax amount. Then, she invests in financial instruments with maximum tax benefits Tax Benefits Tax benefits refer to the credit that a business receives on its tax liability for complying with a norm proposed by the government. The advantage is either credited back to the company after paying its regular taxation amount or deducted when paying the tax liability in the first place. read more .
She invests in PPFs, mutual funds, ELSS, and many other debt funds Debt Funds Debt fund are investments, such as a mutual fund, closed-end fund, ETF, or unit investment trust (UTI), that primarily invest in fixed-income instruments like bonds or other types of a debt security for returns. read more . Consequently, these investments lower her taxable pay amount by 40% ($8000). So, her tax liability over a fiscal year Fiscal Year Fiscal Year (FY) is referred to as a period lasting for twelve months and is used for budgeting, account keeping and all the other financial reporting for industries. Some of the most commonly used Fiscal Years by businesses all over the world are: 1st January to 31st December, 1st April to 31st March, 1st July to 30th June and 1st October to 30th September read more is now worth $12000.
Proactive tax analysis certainly assists small enterprise owners in decreasing their tax liabilities. So here lies a few tax deductions to save the maximum amount of money .
- Health insurance premiums
- Retirement plan contributions
- Professional and legal services
- Business marketing
- Insurance premiums Insurance Premiums Insurance Premium is the amount paid by any individual or a corporate entity to cover themself from uncertain events resulting in heavy economic and non-economic losses. read more related to the business
- Business-related automobile expenditures
- Home office discounts
- Taxes and licensing for the business
- Office supplies
- Self-employment tax Self-employment Tax Self-employment tax is the tax towards social security and Medicare, paid by a self-employed person who has net earnings of $400 or more for the concerned tax period towards the federal government reported through form 1040 schedule SE. read more
Tax Planning Objectives
Generally, the primary goals of tax analysis are:
#1 – Financial Soundness
Please note that the superior tax analysis of an entity is the ultimate testament to its monetary stability and accounting profits Accounting Profits Accounting profit is the net income available after deducting all explicit costs and expenses from total revenue, and it is calculated in accordance with generally accepted accounting principles (GAAP). Operating expenses, labour, transportation, and sales expenses are common examples of these costs. read more .
#2 – Decreased Litigation
Appropriate tax analysis certainly assists avoid the usual disagreement between the taxpayers Taxpayers A taxpayer is a person or a corporation who has to pay tax to the government based on their income, and in the technical sense, they are liable for, or subject to or obligated to pay tax to the government based on the country’s tax laws. read more and tax collectors.
#3 – Minimal Gross Tax Burden
Tax analysis undoubtedly lets the taxpayers exploit the available tax benefits, exemptions, and deductions. In addition, it helps arrange the taxpayers’ commercial operations as per their tax decisions. As a result, it saves the maximum capital amount from being included in the tax liabilities.
#4 – Economic Expansion
The growth of a nation is directly related to the development of its citizens. As tax analysis facilitates the flow of white money, it certainly boosts the country’s fiscal standing.
#5 – Profitable Investment
The more the taxpayers save on their tax liabilities, the more they can devote it to a profitable channel. That is to say, an entity with quality tax analysis can direct its earnings Earnings Earnings are usually defined as the net income of the company obtained after reducing the cost of sales, operating expenses, interest, and taxes from all the sales revenue for a specific time period. In the case of an individual, it comprises wages or salaries or other payments. read more into productive investments or dividends Dividend Dividends refer to the portion of business earnings paid to the shareholders as gratitude for investing in the company’s equity. read more . Consequently, this assists in smart investments with optimum utilization of the available resources.
Frequently Asked Questions (FAQs)
Tax planning is a legal procedure of diminishing tax liabilities by optimally utilizing the tax rebates, deductions, and benefits. It assists the taxpayers in properly planning their annual budget and gaining maximum retirement savings. It has three types, namely, short and long-range, permissive, and purposive tax planning.
Tax planning is a legal approach to acquiring tax savings. The process is legalized as long as the taxpayers don’t intentionally choose tax avoidance or evasion. Moreover, this may include investment in long-term debt vehicles like municipal bonds, ELSS, mutual funds, PPF, etc.
Tax planning is important because it confirms savings on taxes that, in turn, financially strengthen the taxpayers and also helps them easily pass on their inheritance to the beneficiaries. Also, it offers numerous advantages such as decreased litigation, lesser tax burden, assured national economic growth, and increased productivity. This lets them build their finances and level up their fiscal stature.
Recommended Articles
This article has been a guide to Tax Planning and its Meaning. Here we talk about tax planning for individuals, its types, strategies, objectives, and examples. You can learn more about accounting from the following articles –
- Calculate Tax Loss Carry Forward
- What is Financial Planning?
- Calculate Taxable Income
- Privacy Policy
- Terms of Service
- Cookie Policy
- Advertise with us
- Investment Banking Resources
- Financial Modeling Guides
- Excel Resources
- Accounting Resources
- Financial Statement Analysis
- Skip to main content
- Skip to primary sidebar
Business Jargons
A Business Encyclopedia
Tax Planning
Definition : Tax Planning can be understood as the activity undertaken by the assessee to reduce the tax liability by making optimum use of all permissible allowances, deductions, concessions, exemptions, rebates, exclusions and so forth, available under the statute.
Put simply, it is an arrangement of an assessee’s business or financial dealings, in such a way that complete tax benefit can be availed by legitimate means, i.e. making use of all beneficial provisions and relaxations provided in the tax law, so that the incidence of the tax is minimum.
This ensures savings of taxes along with conformity to the legal obligations and requirements. Therefore, it is permitted by law.
Objectives of Tax Planning
- Reduction of Tax Liability : An assessee can save the maximum amount of tax, by properly arranging his/her operations as per the requirements of the law, within the framework of the statute.
- Minimization of Litigation : There is a war-like situation between the taxpayers and tax collectors as the former wants the tax liability to be minimum while the latter attempts to extract the maximum. So, proper tax planning aims at conforming to the provisions of the tax law, in such a way that incidence of litigation is minimized.
- Productive Investment : One of the major objectives of tax planning is the channelisation of taxable income to different investment plans. It aims at the optimum utilization of resources for productive causes and relieving the assessee from tax liability.
- Healthy Growth of Economy : The growth and development of the economy greatly depend on the growth of its citizens. Tax planning measures involve generating white money that flows freely and results in the sound progress of the economy.
- Economic Stability : Proper tax planning brings economic stability by various techniques such as mobilizing resources for national projects or availing ways for investments which are productive in nature.
Tax Planning follows an honest approach, to achieve maximum benefits of tax laws, by applying the script and moral of law. Therefore the objectives do not in any way contradict the concept of tax laws.
Types of Tax Planning
- Short-range and long-range Tax Planning : The tax planning which is made every year to arrive at specific or limited objectives, is called short-range tax planning. Conversely, long-range tax planning alludes to such practices undertaken by the assessee which are not paid off immediately.
- Permissive Tax Planning : Tax planning, wherein the planning is made as per expressed provision of the taxation laws is termed as permissive tax planning.
- Purposive Tax Planning : Purposive tax planning refers to the tax planning method which misleads the law. Under this type, there is no expressed provision of the statute.
Tax planning means intelligently applying tax provisions to manage an individual’s affairs, in order to avail the tax benefits based on the national priorities, in accordance with the interest of general public and government.
Related terms:
- Human Resource Planning Process
- Limitations of Human Resource Planning
- Strategic Planning
- Human Resource Planning
Reader Interactions
Anushka Singh says
May 5, 2019 at 11:03 am
This is very helpful for the students of commerce or BBA .
Sunil Naik says
October 15, 2019 at 7:58 am
This is my syllabus is covered i am so happy Thanking you
Shubham Tyagi says
November 17, 2019 at 12:22 pm
It covered my whole of the syllabus. Language is so simple and lucid and easy to understand . It helps me in preparing my project on Tax Planning so that’s why I am very happy and thankful to this.
deepasaini says
January 10, 2020 at 10:19 pm
this is very helpful for the students of MBA.. thnku
Francisco Mejia says
May 7, 2020 at 6:35 am
EXCELLENT!..
November 29, 2020 at 1:12 pm
This helps me a lot, after reading this, I can pass the examination in taxation subject. Thank You 🙏
Mariyatu says
October 9, 2021 at 2:23 am
Is meaningful, gives me clear understanding of tax planning and helpful for my seminar topic
Leave a Reply Cancel reply
Your email address will not be published. Required fields are marked *
- Search Search Please fill out this field.
- Tax Planning
What Is Tax Planning?
Tax planning explained.
:max_bytes(150000):strip_icc():format(webp)/IMG_0031-a6116af31d5a4783a969390cd325367c.jpg "what is tax planning for new business")
How Tax Planning Works
Examples of tax planning, what tax planning means for you, frequently asked questions (faqs).
Hill Street Studios / Getty Images
Key Takeaways
- Tax planning involves implementing a series of strategies for minimizing the percentage of your income that you must pay to the IRS.
- Tax planning can involve claiming tax deductions to reduce your taxable income.
- Tax planning could also look like claiming tax credits to reduce the amount of tax you owe the IRS.
- Talking with a tax professional can guide you as to what tax breaks you might be eligible for, and the IRS offers online tools to help you along as well.
Tax planning is the process of taking certain steps to minimize the amount of money you’ll owe the Internal Revenue Service (IRS). The Internal Revenue Code (IRC) provides numerous options, all of which are perfectly legal.
When you’re about to file your tax return, it’s too late to adjust your income because the tax year is already behind you. But if you plan ahead and understand what strategies there are for reducing taxes owed, you can earn tax breaks in the future.
Tax planning begins with identifying your AGI. You can determine your AGI by completing IRS Schedule 1 , which walks you through the steps. The form tallies up all of your anticipated sources of income in Part I, other than wages or salaries from which taxes are already withheld. It then adds up your anticipated adjustments to income—a form of tax deduction—in Part II.
Your AGI can also determine your eligibility for certain tax credits or deductions. If your AGI is considered too high, you often won’t qualify for some.
Enter these numbers plus your W-2 income from employment, if any, on the corresponding lines of Form 1040 to arrive at your taxable income. At this point, you’re ready to take some tax-planning steps to reduce this amount to a lower tax bracket, if possible. This can result in owing the IRS less, as well as possibly receiving or increasing a tax refund.
Numerous tax breaks are available to reduce your AGI, and you can further reduce your taxable income by claiming certain credits and tax deductions that you can subtract from your total AGI. Find detailed descriptions of the most commonly used ways to reduce your AGI, below.
Tax Credits
Tax credits subtract directly from the amount you owe the IRS when you complete your tax return. Unlike deductions, they don’t simply reduce your taxable income. Some are even refundable, so the IRS will send you money if the credits you claim reduce your tax bill to below zero.
Available tax credits include:
- American Opportunity Tax Credit
- Child and Dependent Care Credit
- Child Tax Credit
- Earned Income Tax Credit
- Credit for Elderly or Disabled
- Lifetime Learning Tax Credit
Let’s look at the American Opportunity Tax Credit as an example. Eligible students receive this credit for qualified education expenses they paid in the first four years of their higher education. Each student receives a tax credit of up to $2,500 each year.
Tax planning for this specific credit might involve paying spring semester tuition and fees for yourself, your spouse, or a dependent in December to claim the credit for that tax year, rather than waiting until January. This could help if you think you’ll be in a higher tax bracket in the current year.
Itemizing vs. the Standard Deduction
As mentioned, taxable income is what is left over after you subtract any eligible deductions, including the standard deduction, from AGI. The majority of taxpayers take advantage of the standard deduction, but itemizing is another option, as it may lower your income more. Generally, if your itemized deductions are greater than the standard deduction, it’s best to itemize.
You can either itemize your tax deductions or you can claim the standard deduction, but you can’t do both. Generally, if your itemized deductions are greater than the standard deduction, it’s best to itemize because this will subtract more from your taxable income.
Standard deductions for 2022 are:
- $25,900 for married taxpayers filing joint returns
- $12,950 for single taxpayers and married taxpayers who file separate returns
- $19,400 for heads of household
For 2023, standard deductions are:
- $27,700 for married taxpayers filing joint returns
- $13,850 for single taxpayers and married taxpayers who file separate returns
- $20,800 for heads of household
Retirement Contributions
Contributions to an IRA can be subtracted from your income on line 19 of Schedule 1, reducing your AGI, up to certain limits. You won’t pay taxes on the portion of your income that you save, but the tax bill will eventually come due when you withdraw the money in retirement. In this case, tax planning defers taxes to a time when you stop working and may well be in a reduced tax bracket.
The deductions and credits mentioned here are just the tip of the iceberg. Do some research on your own, or it may be best to consult a tax professional to make sure you’re not overlooking a chance to deduct or claim a credit for expenses that you pay regularly come tax season.
The most common methods of tax planning include claiming the most advantageous deductions and credits you’re eligible for and making sure you’re not hit with a surprise tax bill when you complete your tax return. This can be as simple as double-checking the tax withholding from your paychecks, particularly if you’ve experienced a significant life change such as gaining or losing a dependent.
The IRS provides helpful information for double-checking your tax withholding on its website, guiding you to the types of events that can affect the taxes withheld from your paychecks. There is also a withholding estimator on its website that can help you determine whether you’re having too little or too much tax withheld. You can submit a revised Form W-4 to your employer at any time to change the withholding from your paychecks so it’s as accurate as it can be.
For those who are self-employed or have investment income, you might want to collect income this year rather than next year if you expect that you’ll be in a higher tax bracket going forward, therefore paying a higher percentage in taxes than you are currently. Likewise, you might want to postpone receiving some income if you believe you’ll be in a lower tax bracket next year.
The bottom line of tax planning is knowing what deductions and credits are available to you, and whether you meet the rules for claiming them. They all come with detailed, qualifying criteria that you must meet, and these rules can sometimes change from one year to the next. That said, the IRS is set up to help you understand them and keep on top of them.
You can subscribe to IRS Tax Tips to receive emails about tax law changes and for tax-planning suggestions. To sign up, go to IRS.gov or use the mobile app IRS2G0.
What are the recognized methods of tax planning?
Calculating your income and identifying your credits and deductions is the best way to plan for taxes. The IRS has resources to help you plan for the upcoming tax year and a tax professional can be of further assistance to ensure your there are no surprises when you file.
IRS. " 1040 ."
IRS. “ Credits and Deductions for Individuals .”
IRS. " American Opportunity Tax Credit ."
IRS. “ Year-Round Tax Planning Is for Everyone .” Page 2.
IRS. " IRS Provides Tax Inflation Adjustments for Tax Year 2022 ."
IRS. " IRS Provides Tax Inflation Adjustments for Tax Year 2023 ."
By clicking “Accept All Cookies”, you agree to the storing of cookies on your device to enhance site navigation, analyze site usage, and assist in our marketing efforts.
The Economic Times daily newspaper is available online now.
New businesses and their strange new rules: what should an investor do, now, we have created a business and investment environment where companies that have never made a profit and appear incapable of doing so are bloated and inefficient. their solution is to change accounting rules..
Dhirendra Kumar
CEO, Value Research
Don’t miss out on ET Prime stories! Get your daily dose of business updates on WhatsApp. click here!
- Pure Politics
India is likely to discontinue the second phase of the ₹10,000 crore Faster Adoption and Manufacturing of Electric Vehicles in India or FAME II scheme after the next financial year, government officials familiar with deliberations said.
Hon Hai Precision Industry, better known as Foxconn, has assured the governments of Karnataka and Telangana that it will work with them to further the expansion of its electronic manufacturing base in the country.
The government is developing a platform to help citizens who store their documents in DigiLocker to auto-update their address and other demographic details across departments through Aadhaar, officials told ET.
Read More News on
(Your legal guide on estate planning, inheritance, will and more.)
Download The Economic Times News App to get Daily Market Updates & Live Business News.
ETPrime stories of the day
Find this comment offensive?
Choose your reason below and click on the Report button. This will alert our moderators to take action
Reason for reporting:
Your Reason has been Reported to the admin.
To post this comment you must
Log In/Connect with:
Fill in your details:
Will be displayed
Will not be displayed
Share this Comment:
Stories you might be interested in
- Celebrities
Tax Planning For Small Business Owners - Save More And Grow Your Business
Tax planning involves anticipating and proactively making decisions about your taxes, rather than simply reacting to the tax laws at the end of the year.
.zklaml-y51p0m{color:inherit;font-size:inherit;-webkit-text-decoration:none;text-decoration:none;text-decoration-thickness:1px;}.zklaml-y51p0m:hover{-webkit-text-decoration:underline;text-decoration:underline;}.zklaml-y51p0m:hover::after{content:" #";opacity:0.6;-webkit-text-decoration:none;text-decoration:none;} Managing Personal Finances During A Recession: Key Considerations
In addition to tax planning, it is also important for small business owners to understand the importance of managing their finances during a recession.
COPYRIGHT_WI: Published on https://washingtonindependent.com/tax-planning-for-small-business-owners/ by Habiba Ashton on 2023-02-23T03:05:13.934Z
A recession can have a significant impact on a small business, and it is important to be proactive in managing your finances to minimize its impact.
Tax Planning For Small Business Owners - Understanding Tax Laws
One of the first steps in tax planning for small business owners is to understand the tax laws that apply to your business.
This includes understanding the different types of taxes, such as income tax, sales tax, and property tax, as well as the tax laws that apply to your business structure, such as a sole proprietorship, partnership, or corporation. It is also important to stay up-to-date on changes in tax laws, as they can have a significant impact on your business.
Tax Planning For Small Business Owners - Tax-Saving Strategies
Once you have a good understanding of the tax laws that apply to your business, it is important to explore tax-saving strategies that can help you minimize your tax bill.
Some of the most common tax-saving strategies for small business owners include taking advantage of tax deductions and credits, such as the home office deduction, the small business health care tax credit, and the self-employed health insurance deduction.
Additionally, it is important to consider strategies for deferring income and maximizing deductions, such as contributing to a retirement plan or setting up a tax-deferred annuity.
Tax Planning For Small Business Owners - Record-Keeping
To take advantage of tax-saving strategies and minimize your tax bill, it is essential to keep accurate and complete records of your income and expenses. This includes keeping receipts and invoices for all business-related purchases, as well as consistently tracking your income and expenses.
In addition to helping you take advantage of tax-saving strategies, accurate record-keeping can also help you in the event of an audit.
Managing Personal Finances During A Recession - Budgeting
One of the most important considerations for managing your finances during a recession is budgeting. Budgeting involves tracking your income and expenses and making adjustments as necessary to ensure that you are spending less than you earn.
This can help you maintain financial stability and minimize the impact of a recession on your finances. In addition to tracking your income and expenses, it is also important to consider ways to reduce your expenses, such as cutting back on discretionary spending and finding ways to save on essential expenses.
Managing Personal Finances During A Recession - Saving
In addition to budgeting, it is also important to have a plan for saving during a recession. This can include creating an emergency fund, which can help you cover unexpected expenses, as well as contributing to a retirement account or other investment vehicle to help you build your wealth over time.
Additionally, it is important to consider ways to increase your income, such as taking on additional work or finding ways to monetize your skills and talents.
Tax Planning For Small Business Owners - Strategies For Maximizing Your Earnings
Small business owners are the backbone of the American economy. They create jobs, drive innovation, and drive growth in their communities. However, running a small business can also be a challenging and stressful experience, especially when it comes to taxes.
With tax laws and regulations constantly changing, it can be difficult for small business owners to keep up with the latest information and make informed decisions about their finances.
One of the most important aspects of running a small business is tax planning. Proper tax planning can help small business owners maximize their earnings and minimize their tax liability.
Know Your Tax Obligations
The first step in tax planning for small business owners is to understand their tax obligations. This includes knowing which taxes you are required to pay, the due dates for each tax, and the tax rates that apply to your business.
Small business owners can find this information on the IRS website or by speaking with a tax professional.
Use Tax-Deductible Expenses
Small business owners can reduce their taxable income by taking advantage of tax-deductible expenses. This includes things like business equipment and supplies, rent, utilities, and travel expenses.
By keeping accurate records of these expenses, small business owners can reduce their taxable income and lower their tax liability.
Create A Retirement Plan
Small business owners can also reduce their taxable income by contributing to a retirement plan. There are several types of retirement plans available to small business owners, including traditional and Roth IRAs, SEP IRAs, and SIMPLE IRAs.
By contributing to a retirement plan, small business owners can reduce their taxable income and save for the future.
14 Biggest Tax Write Offs for Small Businesses! [What the Top 1% Write-Off]
Take Advantage Of Tax Credits
Small business owners can also reduce their tax liability by taking advantage of tax credits. There are many tax credits available to small business owners, including credits for hiring employees, investing in renewable energy, and offering health insurance to employees.
By taking advantage of tax credits, small business owners can lower their tax bills and keep more of their hard-earned money.
People Also Ask
What is the first step in tax planning for small business owners.
The first step in tax planning for small business owners is to understand their tax obligations, including which taxes they are required to pay, the due dates for each tax, and the tax rates that apply to their business.
What Are Some Tax-deductible Expenses That Small Business Owners Can Take Advantage Of?
Small business owners can take advantage of tax-deductible expenses such as business equipment and supplies, rent, utilities, and travel expenses to reduce their taxable income and lower their tax liability.
What Types Of Retirement Plans Are Available To Small Business Owners?
Small business owners can contribute to traditional and Roth IRAs, SEP IRAs, and SIMPLE IRAs to reduce their taxable income and save for the future.
What Tax Credits Are Available To Small Business Owners?
Small business owners can take advantage of tax credits for hiring employees, investing in renewable energy, and offering health insurance to employees to lower their tax bills and keep more of their hard-earned money.
In conclusion, tax planning for small business owners is an essential aspect of running a small business.
By understanding their tax obligations, taking advantage of tax-deductible expenses, creating a retirement plan, and utilizing tax credits, small business owners can maximize their earnings and minimize their tax liability.
Proper tax planning is a key part of building a successful and financially stable business. Additionally, during economic downturns, small business owners need to manage their finances carefully to ensure that they have enough money to cover their expenses and protect their financial well-being.
By following these tips and seeking the advice of a tax professional, small business owners can make informed decisions about their finances and achieve their financial goals.
About The Authors
Habiba Ashton - BCS Growth Fund (Israel) L.P., a private investment fund specializing in investments in technologically focused businesses with high growth potential, employs Habiba as an analyst. Mrs. Ashton served as an analyst and information manager at the Israel International Fund, the first Israeli venture capital fund designed specifically for Japanese corporate investors, prior to joining BCS. Habiba graduated with honors from Israel's College of Management with a B.A. in Business Administration.
Recent Articles
No articles found.
We've updated our privacy policy. Click here to review the details. Tap here to review the details.
Activate your 30 day free trial to unlock unlimited reading.
Tax planning for setting up of a new business
You are reading a preview.
Activate your 30 day free trial to continue reading.
Check these out next
Download to read offline
Tax planning: OBJECTIVES: Reduction of tax liability Minimisation litigation Productive investment Healthy growth of economy Economic stability Benefit accrued from “MAKE IN INDIA”: Facilitating USD 55 Billion investments to create 1.6 million jobs FDI flow USD 130 Billion [2014-16] Enabling startups with the INR 10,000 crore “Fund of Funds” Provisions made for startups to get tax exemption for 3 years 3,43,311 youth trained with 81% placement[2014-16]
Recommended
More Related Content
Slideshows for you (20).
Similar to Tax planning for setting up of a new business (20)
More from Ajit Majumder (16)
Recently uploaded (20)
- 1. PRESENTATION ON TAX PLANNING TAX PLANNING WITH REFERENCE TO SETTING UP OF A NEW BUSINESS BENEFIT ACCRUED FROM “MAKE IN INDIA” VARIOUS SCHEMES AND POLICIES FOR NEW ENTREPRENEURS PRESENTED BY AJIT MAJUMDER ABMFT 1601
- 2. TAX PLANNING OBJECTIVES: Reduction of tax liability Minimisation litigation Productive investment Healthy growth of economy Economic stability
- 3. TAX PLANNING WITH REFERENCE TO SETTING UP OF A NEW BUSINESS Location of new business Nature of new business Form of new business
- 4. LOCATION OF NEW BUSINESS Industrial undertaking in free trade zones (sec 10A) 100 per cent export oriented undertaking (sec 10B) Industrial undertaking in an industrially backward state or district (sec 80IB)
- 5. NATURE OF NEW BUSINESS Venture capital companies [sec 10(23FB)] Infrastructure capital companies [sec 10(23G)] Tea development account [sec 33AB] Site restoration fund [sec33ABA] Telecommunication services [sec 35ABB] Reserves for shipping business [sec 33AC] Amortisation of certain preliminary expenses [sec 35D] Deductions for expenditure on prospecting for certain minerals [sec 35E] Special provision for deduction in the case of business for prospecting for mineral oil [sec 42 &44BB]
- 6. Special provisions for computing profits and gains of business of civil construction [sec 44AD] Special provisions in the case of business of plying, hiring or leasing goods carriages [sec44AE] Special provisions for computing profits and gains of retail business [sec 44AF] Special provisions in the case of shipping business[sec 44B] Special provisions in the case of business of operation of aircraft [sec 44BBA] Special provisions in the case of certain turnkey power projects [sec44BBB] Special provisions in the case of royalty income of foreign companies [sec 44D]
- 7. Profits and gains from industrial undertakings engaged in infrastructure, etc [sec 80IA] Profits and gains from certain industrial undertakings other than infrastructure development undertakings [sec 80IB] Profits and gains from the business of collecting and processing of bio-degradable waste [sec 80JJA] Employment of new workmen [sec 80JJAA] Special tax provision under sections 115A, 115AB, 115AC, 115AD, 115B, 115BB, 115BBA and 115D.
- 8. FORM OF ORGANISATION Company form of organisation Partnership firm or limited liability partnership Sole proprietorship Hindu Undivided Family
- 9. BENEFIT ACCRUED FROM “MAKE IN INDIA” Facilitating USD 55 Billion investments to create 1.6 million jobs FDI flow USD 130 Billion [2014-16] Enabling startups with the INR 10,000 crore “Fund of Funds” Provisions made for startups to get tax exemption for 3 years 3,43,311 youth trained with 81% placement[2014- 16]
- 10. VARIOUS SCHEMES AND POLICIES FOR NEW ENTREPRENEURS 3 year tax holiday for new entrepreneurs Change in duty rates to boost manufacturing Small bag of goodies for importers Service tax changes in Budget2016 FDI in food retailing Presumptive tax schemes for small business Employee provident fund 80gg deduction increased by Rs. 36000/annum Amendments in companies act, 2013 Capital gains and ARCs
- 11. CONCLUSION With proper tax planning new business can get advantages of tax exemptions, deductions, incentives, rebates and reliefs permitted under law. “MAKE IN INDIA” provides a red carpet for new venture grow, attracts massive FDI and it is awarded best investment promotion agency in 2016 in the world. Supporting government balanced schemes and policies targeting toward achieving social infrastructure and better atmosphere to do business.
- 12. THANK YOU
Share Clipboard
Public clipboards featuring this slide, select another clipboard.
Looks like you’ve clipped this slide to already.
You just clipped your first slide!
Create a clipboard
Get slideshare without ads, special offer to slideshare readers, just for you: free 60-day trial to the world’s largest digital library..
The SlideShare family just got bigger. Enjoy access to millions of ebooks, audiobooks, magazines, and more from Scribd.
You have now unlocked unlimited access to 20M+ documents!
Unlimited Reading
Learn faster and smarter from top experts
Unlimited Downloading
Download to take your learnings offline and on the go
Instant access to millions of ebooks, audiobooks, magazines, podcasts and more.
Read and listen offline with any device.
Free access to premium services like Tuneln, Mubi and more.
Help us keep SlideShare free
It appears that you have an ad-blocker running. By whitelisting SlideShare on your ad-blocker, you are supporting our community of content creators.
We've updated our privacy policy.
We’ve updated our privacy policy so that we are compliant with changing global privacy regulations and to provide you with insight into the limited ways in which we use your data.
You can read the details below. By accepting, you agree to the updated privacy policy.
- Program Guide
Tax Planning Strategies: Tips, Steps, and Resources for Planning
View all blog posts under Articles | View all blog posts under Bachelor's in Accounting
Taxes are a necessity. Just as you wouldn’t want to overspend on other necessities like food and housing, you don’t want to spend any more than you have to in taxes. The key to frugal shopping is to conduct research and have a spending plan. The same goes for minimizing your tax bill.
Tax planning strategies are made more important by the tax code’s complexity. First-time taxpayers may struggle to understand unfamiliar areas such as liabilities, deductions, and financial solutions for protecting assets and saving for the future.
Fortunately, a little time spent devising tax planning strategies offers many benefits beyond tax savings. The process helps individuals and small businesses manage their finances more effectively, reducing total capital outflow and putting more money in their pockets.
Tax Planning Strategies and How They Help
In addition to saving people money, tax planning strategies help taxpayers avoid tax penalties, get the most from their tax deductions, keep their financial documents organized, and plan for the future. By contrast, doing no tax planning takes money away from life’s other necessities by increasing tax bills unnecessarily.
College students are especially susceptible to unwarranted tax hits: Their parents no longer claim them as dependents on their tax returns, and they take on student loan debt. Here are some of the ways tax planning benefits college students, other individuals, and businesses, along with a look at the consequences of poor tax planning.
How Tax Planning Strategies Benefit College Students
According to data analyzed by Savingforcollege.com, 69% of baccalaureate graduates from U.S. colleges and universities in 2019 took out student loans, and their average student loan debt was $29,900. Forbes outlines four tax credits and deductions for recent college graduates and families with children in school. (A tax credit cuts the amount of tax a student has to pay, while a deduction reduces the amount of income that’s taxable.)
- American opportunity tax credit : The American opportunity tax credit (AOTC) program provides an annual tax credit of $2,500 per eligible student with qualified education expenses, such as tuition. Students who don’t owe any taxes can receive 40% of the credit, or $1,000, as a cash refund. (Note that the AOTC has a four-year maximum.)
- Lifetime learning credit : The lifetime learning credit (LLC) program provides up to $2,000 to reimburse students for tuition, fees, and other qualified education expenses. The LLC program doesn’t offer cash refunds for students with no tax liability. The program has no limit on the number of years it can be claimed.
- Tuition and fees deduction : The IRS explains that students are allowed to deduct up to $4,000 from their taxable income each year to compensate for tuition and fees. As with the LLC program, the deduction isn’t available to students who owe no taxes. Also, the deduction doesn’t apply to college costs other than tuition and fees.
- Student loan interest tax deduction : Students or parents who made payments on a qualifying student loan may deduct up to $2,500 of the interest they paid on the loan in the tax year. The deduction applies even if extra payments were made on the loan in the year.
Three helpful tax breaks for college students are the American opportunity credit, which is for education expenses, with a maximum annual credit of $2,500 per student; the lifetime learning credit, which is a credit for tuition for undergraduate, graduate, and professional degree courses, worth up to $2,000 per tax return; and the student loan interest deduction, which is for interest paid on student loans, up to $2,500 per year.
How Tax Planning Strategies Benefit Other Individuals
Tax planning analyzes a person’s finances with the goal of achieving “maximum tax efficiency,” according to Investopedia. The analysis considers many factors:
- Timing of income
- Timing of purchases
- Planning expenditures
- Retirement savings strategy
- Tax filing status and deductions
A tax planning strategy becomes part of an overall plan for making expenditures and allocating retirement and other savings accounts. It allows you to be proactive in all spending and savings rather than reacting when the tax bill comes due.
How Tax Planning Strategies Benefit Businesses
Key to a small business tax strategy is understanding the four types of business taxes that the federal government levies, as The Balance explains: income tax, self-employment tax, taxes for employers, and excise taxes. Once they’ve gathered all the tax forms they require, businesses need to ensure that they’re maximizing all available deductions and tax credits:
- Small business health care tax credit : The small business health care tax credit is available to small businesses with fewer than 25 full-time equivalent employees. The average employee salary is generally $50,000 or less, and the business must pay at least 50% of employees’ health insurance premiums. Coverage must be offered to all full-time employees.
- Work opportunity tax credit : Companies that employ people who are among the groups facing significant employment barriers can claim the work opportunity tax credit. Among the groups are qualified veterans, former prisoners, vocational rehabilitation referrals, Supplemental Nutrition Assistance Program (SNAP) recipients, and long-term family assistance recipients.
- Coronavirus tax relief : Among the programs designed to provide relief for businesses that COVID-19 has impacted are the employee retention credit , the Families First Coronavirus Response Act , and the net operating loss (NOL) carrybacks of C corporations .
The Consequences of Failing to Plan for Taxes
Individuals and businesses risk more than a higher-than-necessary tax bill by not putting a tax planning strategy in place. Should they fail to make a tax payment on time, the IRS imposes penalties and interest on the unpaid amount until the balance is paid in full. The IRS levies penalties for several reasons:
- Failure to file
- Failure to pay on time
- Failure to pay appropriate estimated tax
- Dishonored check
For small businesses and self-employed workers, the IRS offers relief for some penalties in cases in which an effort was made to comply with tax requirements but the tax obligation wasn’t met because of circumstances beyond the taxpayer’s control. These are among the penalties that may qualify for relief:
- Failure to file a tax return
- Failure to meet the requirement to deposit certain taxes
Tax Planning Strategies for Individuals
The adage “Watch the pennies and the dollars will take care of themselves” applies doubly to tax planning strategies for individuals. College students, recent graduates, and others struggling to make ends meet can reduce their tax obligations by taking advantage of tax-saving opportunities available to people in all income categories.
Know Your Dependency Status
The IRS defines a dependent as a qualifying child or qualifying relative :
- A dependent child is a son, daughter, stepchild, foster child, brother, sister, half-brother, or half-sister under age 19 at the end of the tax year, or under age 24 if a student, who is younger than the tax filer.
- To qualify as a dependent child, the person must have lived with the filer for more than half of the year, received more than half of support from the filer, and can’t file a joint return except to claim a refund of tax withheld or estimated tax paid.
- A dependent relative must be related to the filer in one of several different ways , must live with the filer for the entire year, and must have a gross income for the year of less than $4,200.
- The filer must provide more than half of the dependent relative’s total support for the year.
Three tests must be met for the qualifying child or qualifying relative to be claimable as a dependent:
- Dependent taxpayer test: A taxpayer who someone claims as a dependent can’t claim anyone else as a dependent.
- Joint return test: Someone can’t claim a married person as a dependent if the married person files a joint return, except to claim a refund of income tax withheld or an estimated tax payment.
- Citizen or resident test: Only U.S. citizens, resident aliens, U.S. nationals, or Canadian or Mexican residents can be claimed as dependents except for adopted children.
Gather All Required Tax Forms
While many college students and other individual and joint filers will use Form 1040-EZ to complete their tax returns, many people can reduce their tax bills by filing the long Form 1040 along with other standard IRS tax forms. The tax forms that may be required to file an individual or a joint tax return include the following:
- Form 1040 , U.S. Individual Income Tax Return
- Form 1040-V , Payment Voucher
- Form 1040-ES , Estimated Tax Payments
- Form 1099-R , Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.
- Schedule A , Itemized Deductions
- Schedule C , Profit or Loss from Business (Sole Proprietorship)
- Form 1098-T , Tuition Statement
- Form 8863 , Education Credits (American Opportunity and Lifetime Learning Credits)
- Form 8917 , Tuition and Fees Deduction
Understand Tuition Tax Credits and Student Loan Interest Deductions
The IRS explains the differences between its AOTC and LLC programs that offer education credits to students and their parents:
- The AOTC includes credits for such school expenses as course-related books, supplies, and equipment that students require but schools don’t pay for, while the LLC applies only to tuition, fees, and other qualified education expenses.
- The AOTC is available for four years only, while the LLC can be used for any number of years.
- The AOTC has a modified adjusted gross income (MAGI) limit of $80,000 if filing individually and $160,000 if filing jointly. For LLC, the MAGI limit is $68,000 if filing individually and $136,000 if filing jointly.
For student loan interest deductions , the maximum deduction is the lesser of $2,500 or the actual amount of interest the person paid in the year. The deduction amount decreases and is ultimately phased out as the person’s MAGI reaches the annual limit for the filing status. The deduction is claimed as an adjustment to income, thus eliminating the need to itemize deductions to qualify for it.
Know the Tax Requirements for Your Home State and School State
For most college students, their home states remain where their families reside even if they attend out-of-state schools. Intuit explains how to determine your home state for federal tax purposes :
- The residence shown on your driver’s license
- The state where your vehicle is registered
- The state where you’re registered to vote
- The state where you own property
However, if out-of-state students earned income in the states where they attend school, they may need to file nonresident state tax returns and pay income taxes to the states. The students may also need to file state tax returns in their home states, but they’ll receive credit for any income taxes they pay to another state.
Resources for Individual Tax Planning Strategies
- S. Internal Revenue Service, Tax Information for Students — Links to complete the Free Application for Federal Student Aid (FAFSA), filing instructions, and higher education tax benefits.
- S. Internal Revenue Service, Credits and Deductions for Individuals — Detailed descriptions of various tax credits and deductions available to individuals.
- S. Internal Revenue Service, Good Tax Planning Includes Good Recordkeeping — Tips for keeping tax records well organized.
Small Business Tax Planning Strategies
Tax planning isn’t likely to be at the top of the to-do list for someone starting a business. However, small business tax planning strategies can spell the difference between success and failure for old and new businesses alike. Following are some topics that business owners need to keep in mind when preparing to meet their tax obligations, whether they handle their taxes internally or outsource their tax planning.
Tax Planning Strategies for New Businesses
New businesses need to be aware of the taxes they may be subject to , as Inc. explains:
- Income taxes: In addition to federal income tax, most businesses will be responsible for state income taxes. The taxes apply to C corporations, in which the business pays the tax; sole proprietorships; partnerships; limited liability companies; and S corporations, in which the owners are responsible for income taxes.
- Employment taxes: Any business that hires employees must withhold income taxes and the employees’ share of Social Security and Medicare (FICA) taxes. The business is responsible for its share of FICA taxes as well as state and federal unemployment taxes.
- Sales taxes: Any goods or services that are sold in a state that applies a sales tax require that the business collect the tax from customers at the time of the transaction. The state may levy penalties against businesses that fail to collect the sales taxes.
- Excise taxes: Some businesses may have to pay excise taxes for their use of fuel, highway use by trucks, and other activities.
Six helpful tax deductions for small businesses are cost of goods sold, in which you deduct costs of products you create, manufacture, or purchase for sale; qualified business income, where you deduct 20% of your income, according to the 2018 tax reform law; home office, in which you deduct part of your mortgage, rent, insurance, and utilities; travel, where you deduct costs for miles driven, tolls, plane tickets, and taxi rides; advertising, or deducting the cost of websites, social media ads, print ads, and business cards; and taxes, where you deduct self-employment taxes, state and local income taxes, and real estate taxes.
Business Property Deductions
Among the deductions the IRS allows businesses to take are those for rent payments on properties that the businesses don’t own, unless they receive equity in or titles to the properties. For home-based businesses, expenses for the use of the home may be deducted, including a percentage of mortgage interest, insurance, utilities, repairs, and depreciation.
Similarly, business use of a privately owned vehicle may allow for the vehicle’s expenses to be deducted on the business’s tax return. Only the mileage attributable to business use qualifies for the deduction, which is based on miles driven and varies from year to year.
Tracking Income and Expenses
The IRS lists the type of records that small businesses and self-employed individuals need to keep for tax purposes:
- Gross receipts: This category includes cash register tapes, deposit information, receipt books, invoices, and Form 1099-MISC entries.
- Purchases and expenses: This category includes canceled checks and other proofs of payment, cash register tape receipts, invoices, and credit card receipts and statements.
- Travel, transportation, entertainment, and gifts: Deductions in this category must be substantiated under guidelines explained in IRS Publication 463 , which covers topics such as how to use the standard mileage rate.
- Assets: This category includes information about the property that the business owns, including date of purchase, price, cost of improvements, deductions taken, how it’s used, and how it’s disposed of (resale price, etc.).
- Employment taxes: Specific employment tax records must be kept for four years, as explained in IRS Publication 15 and Employment Tax Recordkeeping .
Contributing to a Retirement Plan
The IRS describes the benefits for small business owners who contribute to retirement plans for themselves and their employees:
- Businesses can deduct retirement contributions from taxable income.
- The assets are able to grow tax-free.
- Retirement plans offer businesses many options for how and when they contribute.
- Starting a plan allows businesses to qualify for credits covering some of the implementation costs.
- Retirement plans help employers attract and retain qualified employees.
The IRS provides information that describes the types of retirement plans and retirement plans for small businesses , such as simplified employee pension (SEP) plans, as well as tips for choosing a retirement plan for a small business .
Restructuring Your Business
The IRS requires that businesses capitalize any improvement costs, but maintenance costs that don’t improve the business, such as lighting or plumbing repair, can be deducted as business expenses. However, when businesses reorganize, they must pay a one-time restructuring charge , as Investopedia explains.
Typical scenarios in which the restructuring charge applies include acquisitions, downsizing, relocating, consolidating debt, and writing off assets. Restructuring expenses are considered nonrecurring operating costs. While tax-deductible costs include starting or acquiring a new business, restructuring costs are immediately deductible only if the transaction isn’t completed.
Resources for Small Business Tax Planning Strategies
- S. Internal Revenue Service, Small Business and Self-Employed Tax Center — Information for those filing Form 1040 or 1040-SR; Form 2106; and Schedule C, E, or F.
- S. Internal Revenue Service, Deducting Business Expenses — An explanation of all categories of deductions available to small businesses and self-employed individuals.
- S. Small Business Administration, Tax Planning and Reporting for a Small Business — A guide including a pretest and a self-test for small business tax planning requirements.
Advanced Tax Planning Strategies and Tips
Tax planning’s benefits extend beyond the current tax year and accrue over time. Forbes describes five advanced tax planning strategies that offer big payoffs in the future.
- Property investment: Real estate tax advantages have benefited long-standing businesses and generations of families. However, many of the benefits require being classified by the IRS as a real estate professional .
- Business purchase: While a purchased business must earnestly seek to make a profit, it provides leverage for legitimate deductions that would otherwise be taxable.
- Roth 401(k): A Roth 401(k) can be used in ways that don’t apply to a Roth IRA; for instance, a Roth 401(k) may be used for funneling real estate appreciation and rents that would otherwise be taxable.
- Smart qualified plans: Businesses can save on taxes by using an SEP and a savings incentive match plan for employees (SIMPLE) to fund tax-deductible retirement plans, which can increase tax-free contributions by as much as $150,000.
Deducting More Complex Expenses
Taxpayers who itemize rather than take the standard deductions for their tax brackets need to know whether they qualify for any tax deductions and credits the IRS offers. NerdWallet lists the most common deductions and credits for individuals .
- The child tax credit offers up to $2,000 per child age 16 or younger who qualifies as a dependent, while the child and dependent care credit pays 20% to 35% of child care or similar costs for a child under age 13, up to $3,000 (up to $6,000 for two or more dependent children).
- The earned income tax credit provides low- and moderate-income taxpayers with a refundable tax credit that in 2020 ranges from $538 to $6,660.
- The retirement savings contribution credit , or “saver’s credit,” is available to anyone over age 18 who isn’t claimed as a dependent on another person’s tax return. If a person’s adjusted gross income is below a certain threshold, tax savings can be worth up to $1,000, depending on the contribution to a qualified retirement plan.
Adding Employee Benefits
Businesses can deduct the cost of providing certain benefits to their employees, including health plans and gifts. The Balance Small Business describes the employee benefits that companies can deduct from their taxes .
- Bonuses, sick pay, vacation pay, advances, and loans
- Commuting reimbursements, such as van pools, transit passes, parking, and bicycle commuting
- Education assistance expenses (deductible in part, although some employees, owners, and family members are excluded)
- Fringe benefits, such as accident and health plans, dependent care assistance, cafeteria plans, life insurance, and adoption assistance
Note that employee awards, such as gift cards, gift certificates, sporting event tickets, meals, lodging, vacations, and securities, aren’t tax deductible.
Importance of Tax Planning
For individuals and businesses alike, the key to achieving their goals is planning. Tax planning’s importance is evident in the amount of money that can be saved by taking steps to minimize the tax burden. Those steps will change as a business grows or a person advances in a career. However, the need for careful strategic tax planning remains from beginning to end.
Examples of Beneficial Tax Planning Strategies
The sooner you begin developing a strategic tax plan, the quicker you can realize the benefits. Financial services firm Brady Ware describes four scenarios in which a specific tax planning strategy paid dividends .
- Contribution bunching: By combining charitable contributions in specific tax years, filers can take the itemized deductions in some years while taking the higher standard deduction in other years.
- 529 plan : A 529 plan is a tax-advantaged savings plan, as Investopedia explains. Common types are tax-deferred savings plans that allow tax-free withdrawals for qualified education expenses, and prepaid tuition plans for participating colleges and universities that lock in current tuition rates. (Note that the plans are run by states, so rules vary based on jurisdiction.)
- Entity structure for self-employed individuals: One-person businesses that start as limited liability corporations (LLCs) make the owner responsible for all tax liabilities. By restructuring as an S corporation, which is a flow-through entity, the business avoids double taxation. Owners and investors are taxed only for revenue rather than for the value of the business.
- Required minimum distributions: Anyone over 70 and a half years old who has an inherited individual retirement account must take the required minimum distribution by December 31 of the tax year. If less than the full required distribution is taken, the person could be subject to a 50% excise tax on the unpaid portion.
How Lack of Planning Can Raise Your Tax Bill
Every December, some taxpayers rush to find ways to reduce their tax bills for the year. USA.gov provides a rundown on recent tax law changes , including which tax breaks are being extended, late changes in tax forms and instructions, and changes in fees and deductions.
- The IRS describes the impact of recent COVID-19 legislation on employment taxes .
- The IRS also explains changes to retirement plans as a result of COVID-19 .
- Investopedia provides guidance to taxpayers who are planning their 2020 taxes , including whether stimulus payments are taxable, changes to tax brackets and rates, and increases in standard deductions.
- The IRS examines the impact of recent tax reforms on business taxpayers , such as the need to recalculate estimated tax payments, and revisions and additions to business tax deductions.
No business or individual can expect to achieve success without having well-thought-out plans that include strategies for minimizing their tax bills. The key is to have a tax planning strategy that’s thorough but also flexible enough to adapt as economic, social, and political conditions change. A tax plan that’s complete and up to date will pay bountiful rewards today and tomorrow.
Infographic Sources
IRS, American Opportunity Tax Credit
IRS, Deducting Business Expenses
IRS, Lifetime Learning Credit
IRS, Topic No. 456 Student Loan Interest Deduction
Bring us your ambition and we’ll guide you along a personalized path to a quality education that’s designed to change your life.
Already registered? Login now
What is the Importance of Tax Planning for a Startup in India?
In the contemporary financial era, Startups or budding ventures are leading the marketplace with innovative ideas and an enthusiastic approach towards business. But, to function smoothly, it is also important for the startups to implement a few effective strategies.
Amongst them, tax planning is one of the essential compliances for the startups as it not only helps the new businesses to save taxes legally but also having financial stability within the organization. Now, let us understand what is called tax planning?
What is Tax Planning?
It is the systematic financial process for minimizing the taxable amounts by efficiently maintaining the business activities, taxation return filings while following all the legal provisions and helping the organization or an individual to save the hard-earned money.
In the process of tax planning for new business or startups, the tax consultants regularly manage all the financial transaction records, investments, cash flow, expenses of the organization to ensure a deducted amount of levied tax, and finally guide the startup to file the taxes within the given timeline.
Following the provisions of the Income Tax Act, 1961 of the Indian Govt. every entitled individual and business ventures are bounded to pay the taxes. But, through the holistic tax planning procedure, a Startup can conduct the taxation process with ease and avoid the complicated circumstances related to tax liability.
What is the importance of Tax Planning for a Startup?
Tax planning has numerous importance for a Startup. Among them, the notable beneficial characteristics are namely –
- Choosing the Accurate form of Company Incorporation
As per the Companies Act, 2013 of the Indian Govt. there are a few types of company registrations available in India like Pvt. Ltd. entity, One Person Company (OPC), Limited Liability Partnership (LLP). The tax consultants can guide the startups in registering the business in the most comfortable category to get better tax benefits.
- Maintaining the Cash-flow
When a startup is incorporated, the foremost criteria of the venture is getting the cash-flow moving efficiently. Here the tax planners can efficiently guide the startups through the bookkeeping and tax planning process.
- Handling the Tax Liability
After calculating the year-long transactions, the registered startups are mandated to file the taxes to the authority within the due schedule. The tax planners can assist the business owners in computing the levied taxes and filing them.
- Conducting investments
One more noteworthy importance of tax planning for the startup is attracting investments for the business. The tax planners are not only expertise in tax-related compliances, but they also analyze the business insights, financial stabilities and thus can pitch to the financiers to invest in the organization.
- Resisting Legal Consequences
Every type of levied taxes in India like Income Tax Returns , TDS, are required to be filed before the deadline and a lot of legal complications can arise if the taxes are not filed properly. Here the tax planners can safeguard a budding startup by managing all the taxation barriers.
Find this article helpful? Feel free to share with others to raise awareness of the importance of tax planning for Startups in India.
Share With :
Leave a comment cancel reply, anjali malhotra, ask our expert, recent post.
Get to Know The Copyright Registration Cost Slab in India
06 Mar, 2023
Importance of E-Commerce in Modern-Day Business
03 Mar, 2023
GST Registration for Freelancers : A Complete Guide
02 Mar, 2023
Adoption Process of Under The Adoption Laws in India
21 Feb, 2023
Role of SIDBI in Granting Direct & Indirect Loans in India
17 Feb, 2023
Trending Post
Consumer Complaint against Tamil Nadu Electricity Board TNEB
30 Nov, 2020
How to Take Legal Action against Mental Harassment in India?
07 Nov, 2020
UPPCL Uttar Pradesh Power Corporation Ltd. Complaint Filing
19 Nov, 2020
How to File a Complaint Online in Consumer Court in India
27 Nov, 2020
Online Complaint Filing against Hero Motocorp
04 Dec, 2020
Book Free Consultation
Redirecting to payment page...
- Refund Policy
- Privacy Policy
- Terms and Conditions
These are the new tax brackets for 2023
In 2022, Canadians experienced high inflation levels as shifts in the global economy began to settle. Canada’s tax brackets are indexed and adjusted to account for inflation .
This means that there are going to be some changes as we move into 2023.
These changes could impact how you’re taxed when you file your 2023 income tax returns next year.
Below, I’ll outline the new tax brackets for this year and discuss some other notable changes that could affect your personal finances.
The new federal tax brackets for Canadians in 2023
In 2023, Canada’s federal tax brackets increased by 6.3% to account for inflation.
Here are the tax brackets for 2023, as outlined by the CRA :
Any Canadians earning less than $53,359 in taxable income per year (but above the basic personal amount of $15,000) will be subject to the base 15% tax rate .
Why are Canada’s tax brackets changing?
Every year, Canada incrementally changes the federal income tax brackets to account for inflation. These tax rates, along with other benefits, tax credits, and payments, are indexed to the inflation rate. Since inflation increased dramatically in 2022, the tax brackets saw considerable changes and were increased by 6.3% for 2023.
As inflation rises, the cost of consumer goods typically increases along with wages. Indexing tax brackets to inflation is a good thing, as it reduces the amount of taxes you pay. If tax brackets didn’t change to account for this, then people would be paying a disproportionately high tax rate based on their income.
For example, imagine a scenario where tax brackets aren’t indexed to inflation for 50 years. By then, wages will be much higher, and nearly everyone will be in the highest tax bracket, even if they are low-income earners. By increasing tax brackets, the government ensures that lower-income earners are not unfairly taxed at a high rate due to inflation.
That being said, Canada’s inflation rates are expected to decrease moving into 2024, likely resulting in a smaller adjustment to the federal income tax brackets.
Tax rate indexation increases by year
Here’s a quick look at how the federal government’s income tax brackets have increased over the past few years to account for inflation levels, based on CRA data :
2023 saw the largest indexation increase in recent years, which is why the tax brackets have changed significantly.
What is the basic personal amount for 2023?
The basic personal amount is a tax credit that all Canadian taxpayers can claim to help reduce the federal income tax they owe. Federal income tax rates don’t kick in until after the individual has earned more than the basic personal amount.
In 2022, the basic personal amount was $14,398. This year, however, the basic personal amount was increased to $15,000 . Moving forward, the federal government announced that it would begin indexing the basic personal amount to inflation (which it previously wasn’t).
For higher-income earners, the basic personal amount tax credit decreases incrementally. If you’re in the 29% tax bracket and earn less than $235,675 per year, then you’ll be entitled to claim the full $15,000 basic personal amount.
However, once you reach the 33% tax bracket and earn over $235,675 per year, your basic personal amount decreases to $13,521 .
Other notable tax and benefit changes for 2023
Here are some of the other notable changes that may affect your 2023 taxes.
1. TFSA contribution room increase
This year, the annual contribution room for tax-free savings accounts is $6,500, up from the $6,000 contribution room in 2022. Those who have been eligible for the TFSA program since 2009 (when it began) now have a total contribution room of $88,000.
2. EI premiums increase
In 2023, Employers Insurance (EI) premiums are increasing for both employees and employers. Employees are now subject to a 1.63% EI premium , and employers are now subject to a 2.28% EI premium.
3. Introduction of First Home Savings Account (FHSA) in 2023
This year, the government is introducing an excellent new initiative to help Canadians save for their new homes. The First Home Savings Account (FHSA) allows your contributions to grow tax-free as you prepare to purchase your first home.
As long as the money is withdrawn and put towards your first home, it’s non-taxable, like a TFSA. Additionally, the contributions you make to an FHSA are tax-deductible, similar to an RRSP.
How will the new tax brackets affect Canadians?
Tax brackets are indexed for inflation to help keep the tax rate steady, despite changing economic conditions. It’s good to be aware of the updated tax brackets, so you can plan for the year and maximize your RRSP contributions and tax deductions.
The updated tax brackets will help all of those earning $50,197 or more (that was the first threshold for the 20.5% tax rate in 2022), which is now $53,359 in 2023, a significant increase. While tax brackets aren’t that important during salary negotiations, inflation should definitely be mentioned. For example, if you got less than a 6.3% raise in 2022, your buying power will be less than it was in 2021. That point could be brought up during performance reviews with your boss.
If you’re unsure of how to account for the changes yourself, it may be helpful to speak with a licensed financial advisor or accountant.
Christopher Liew is a CFA Charterholder and former financial advisor. He writes personal finance tips for thousands of daily Canadian readers on his Wealth Awesome website .
Do you have a question, tip or story idea about personal finance? Please email us at [email protected] .
MORE Business News
Powell: rate hikes could accelerate if economy stays strong.
France on strike: Unions say 'non' to higher pension age
Lego posts boost in profit, sales as it raised some prices
Malls could turn empty Nordstrom stores into residential units, says one expert
Amid high inflation, MPs should push grocer CEOs to disclose margins on food: experts
Women powered pandemic shift toward higher paying jobs, but pay gap persists: RBC
China's trade contracts as Western demand weakens
Wall Street stalls out ahead of testimony by Fed's Powell
YOUR FINANCES
Opinion | these are the new tax brackets for 2023.
There are going to be some changes to Canada's tax brackets as we move into 2023. These changes could impact how you’re taxed when you file your 2023 income tax returns next year.
Canadian food bloggers share tips, tricks to make filling budget-friendly meals
Food bloggers and cookbook authors say meal-planning and simple recipes can help home cooks put together filling and tasty dishes on a budget -- an increasingly stressful challenge amid rising food prices.
Canadians fell for more home improvement scams in 2022, new report finds
The Better Business Bureau says Canadians fell for home improvement scams the most in 2022, in a report highlighting the riskiest scams and how much money they cost Canadians.
'Not every sale is a bargain': How to avoid common money mistakes
In light of new poll results that found Canadians are spending a lot of time worrying about money, one personal finance expert shares some simple tips to help Canadians avoid making some common, costly mistakes with their cash.
Opinion | Does buying an electric vehicle make financial sense?
While there are many benefits to electric cars, the question of whether they are a good financial choice in Canada is still up in the air, personal finance contributor Christopher Liew explains on CTVNews.ca.
opinion | Is cryptocurrency a good investment?
The recent upturn in cryptocurrencies has inspired many to reconsider investing. But is it really a good idea? In a column on CTVNews.ca, personal finance contributor Christopher Liew explores some of the pros and cons so that you can make an informed choice.
opinion | Before you do your taxes, take note of these tax credits and deductions you may not have known about
Many Canadians are experiencing strains caused by the increased cost of living and inflation. In his exclusive column for CTVNews.ca, contributor Christopher Liew shares some of the top credits and deductions that you may be able to claim on your income tax return to help you save money.
opinion | How much rent can you afford?
Many Canadians have continued to see an increase in their rental rates in 2023. In an column on CTVNews.ca, personal finance contributor Christopher Liew explains how to calculate how much rent you can afford.
Corporate Tax Planning: Meaning, Objective, Types, Advantages and Limitations
Table of Contents
Meaning of Corporate Tax
Income earned by a person (who comes under the threshold limit) is taxable under the Income Tax Act 1961. A person liable to pay tax has to find out the best way to make use of the deductions available to him. The planning done by the person to reduce his tax liability by making use of the allowances, deductions and other privileges available to him is known as tax planning.
Every business registered under The Companies Act, 2013 is mandatorily liable to pay the tax accrued to them. The companies have different deductions and provisions which are available to them. The process of analysing all the provisions to reduce tax liability is called Corporate Tax Planning.
Understanding Corporate tax
In simple words, corporate tax planning is the plan laid out by the companies to reduce the tax liability accrued to them by making the optimum use of the different provisions and deductions available to them. This process of tax planning is inevitable in a corporate entity. It minimises the obligation to pay tax to the government with the help of different advantages given to the corporate by the government. For those who have confusions let us make it clear. The business set up in SEZ is free from majority of the tax payable to the government. Even though they are liable to pay taxes to the government they make use of the advantage of working in the SEZ to avoid the burden of paying taxes. Did you understand the concept?
Please enable JavaScript
It might be a little difficult to understand the corporate measures taken by the company to reduce the tax because it is a result of continuous efforts and study that take part in the organisation.
We said corporate tax planning is an inevitable process in an organisation. Can’t a company survive without tax planning? The answer to the question is no. Tax planning is very essential to ensure the smooth working of the organisation.
Let us now look into the objectives that are behind the setting up of tax planning.
Objectives of Corporate Tax Planning
Let us now look into each objective in detail
Reduction of Tax Liability
The most important and main objective of corporate tax planning is to reduce the burden of the tax. Every corporate has some fixed amount of tax which is imposed upon them. They are inevitable. So in this case the additional taxes incurred by them need to be managed properly so that the burden can be reduced to an extent.
Economic Stability
A firm that plans its tax accordingly will have a stable economic position over other firms. We all know that corporate tax is subject to double taxation ie, the profits earned by the company are subject to tax, and this profit distributed among the stakeholders is also subject to the tax as that becomes a part of their income. So once the firm plans the tax accordingly this can be avoided to an extent by understanding the different deductions available to them and enjoying an economic privilege.
Increased Production
The firm is reducing its tax liability. The money saved by the firm can be put to other profitable and productive uses. This will in turn give rise to the optimum utilisation of the resources available to the firm.
Awareness regarding Deductions
The corporate will dig deep into the different provisions, rebates and deductions stated in favour of them in the light of tax reduction. The company will have a clear idea of the versatile options available to them and make use of them in the most efficient manner. They will be aware of these deductions only if they are keen to do tax planning in a corporation.
Minimize Litigation
The corporate even though finds ways to reduce tax corporate planning act as a standard by which this financial planning should take place. They lay out a just plan which does not break any rules of the government system that should be followed. Thus, there is a smooth link between the government and the corporate.
Planning of sales and capital
Corporate tax planning includes the proper planning of the capital that should be introduced to the business and the sales that are to achieve. There should always be a balance of both to avoid the imposition of high taxes due to high fluctuations in the business.
From the above, we can understand that corporate tax planning helps in the smooth running of the organisation. We now need to know the different types of corporate tax planning
Types of Corporate Tax Planning
Short-range and long-range tax planning.
Plans laid out by the corporate can differ in their nature. They may serve a single purpose or maybe they will act as a standard for the entire tenure of the organisation. If the plan is stated for a particular purpose and is usually of limited scope is called short-range tax planning. They are usually put forward at the end of the year. On the other hand, when the plan is outstretched for the whole fiscal year it is called long-range tax planning. The incidence and impact will be there for a foreseen future.
Purposive tax planning
In this the corporate tax take into consideration all the tax provisions available to them. They avail all the tax benefits and get the maximum benefit out of that. Making use of the provisions will increase the savings of the corporation.
Permissive tax planning
The organisations take into consideration the deductions and permissions given by the tax authorities to the corporation regarding limiting tax liability. They make use of all the concessions provided to them as per certain sections of the law
Advantages of Corporate Tax planning
We have discussed the different advantages of corporate tax planning in the previous headings. Let us summarise them into the following:
- Minimise the tax liability
- Increase in the use of the resources
- Increased economic stability
- Minimise litigation
- Awareness regarding provisions
- Proper maintenance of the business cycle (production process)
These are the advantage of tax planning. Doesn’t it have any limitations?
Limitations of Corporate Tax planning
The main limitations of corporate tax planning are that:
- Opting to the wrong methods for tax saving like insurance. From an individual point of view, insurance is a good option for tax savings but from a corporate point of view, it is not advisory to insure in numerous insurances for tax savings as it will not give the desired result.
- The corporate will be more focused on the optimisation of resources and maybe this will cause overproduction.
- If the deductions are not clearly understood it may result in tax evasion and result in the attraction of unwanted litigation.
For a corporate firm to achieve the desired success it is necessary to understand all the legal and financial aspects of the working of the business. Tax planning helps the firm to optimize its economic stability and reduce the tax burden of the corporation. All companies registered under the act would follow corporate tax planning to reduce the tax liability imposed on them. Thus we can conclude that a firm following a good systematic corporate tax planning tends to have a successful run for a foreseeable future.
Related posts:
- What is Business? Definition, Nature, Types, and Objective
- Business Objective: Meaning, Types, and Importance
- Objective & Features of Business Environment
- Business Forecasting: Types, Techniques, Need, Advantages, Limitations
- Business Income: Meaning, Computation and Example
- Characteristics and Features of Business Ethics
Add CommerceMates to your Homescreen!
- New Terms of Use
- New Privacy Policy
- Your Privacy Choices
- Closed Captioning Policy
Quotes displayed in real-time or delayed by at least 15 minutes. Market data provided by Factset . Powered and implemented by FactSet Digital Solutions . Legal Statement . Mutual Fund and ETF data provided by Refinitiv Lipper .
This material may not be published, broadcast, rewritten, or redistributed. ©2023 FOX News Network, LLC. All rights reserved. FAQ - New Privacy Policy
Biden proposes tax hike on Americans making over $400,000 to fund Medicare
Higher medicare taxes to hit households earning more than $400,000, white house says.
Steve Moore: Blue states with high taxes are being sucked dry as people leave
'Govzilla' author Steve Moore calls out state wealth taxes on 'Kudlow.'
President Joe Biden wants to raise payroll taxes on Americans earning more than $400,000 in a bid to keep Medicare solvent for at least another quarter-century.
The proposal — part of the president's 2024 budget request set for release on Thursday – would raise Medicare taxes from 3.8% to 5% on annual income above $400,000, according to a White House fact sheet . Biden also floated closing a loophole used by business owners and higher-earners to shield some of their income from additional taxes. The loophole allows some high-paid professionals and other wealthy business owners to shield some of their income from tax by claiming it is neither earned income nor investment income, the fact sheet said.
"Let’s ask the wealthiest to pay just a little bit more of their fair share, to strengthen Medicare for everyone over the long term," Biden said Tuesday in an op-ed published in the New York Times, adding: "This modest increase in Medicare contributions from those with the highest incomes will help keep the Medicare program strong for decades to come."
On top of the tax increase, Biden's plan includes a measure that would allow Medicare to negotiate prices for more drugs and sooner after they enter the market. That builds upon a provision included in the Inflation Reduction Act , passed by Democrats in the fall of 2022, that allowed Medicare to begin negotiating certain drug prices.
BIDEN REIGNITES PUSH FOR NEW MINIMUM TAX ON BILLIONAIRES: WHAT TO KNOW
President Biden speaks to African leaders gathered for the U.S.-Africa Leaders Summit, on Dec. 14, 2022, in Washington. (AP Photo/Patrick Semansky / AP Newsroom)
"That’s another $200 billion in deficit reduction," Biden wrote in the op-ed. "We will then take those savings and put them directly into the Medicare trust fund. Lowering drug prices while extending Medicare’s solvency sure makes a lot more sense than cutting benefits."
The White House estimated the floated changes would extend the Medicare trust fund by an additional 25 years, "beyond 2050."
The proposals are unlikely to garner much support in a deeply divided Congress , and face almost certain rejection from Republicans who won control of the House last year.
US NATIONAL DEBT ON PACE TO BE 225% OF GDP BY 2050, PENN WHARTON SAYS
Without any congressional action, the Medicare Trustees Report currently projects the federal health insurance program will be insolvent by 2028.
The tax-hike proposal comes just one month after Biden accused Republicans of wanting to slash Medicare and Social Security during his State of the Union Address , prompting cries of outrage from Republican lawmakers.
The dome of the U.S. Capitol in Washington, Oct. 4, 2021. (AP Photo/J. Scott Applewhite / AP Newsroom)
GOP lawmakers have repeatedly pushed back on that assertion, insisting they do not want to cut funding for either of the entitlement programs.
The back-and-forth between parties precedes looming budget negotiations on Capitol Hill over the federal debt limit, which is currently around $31.4 trillion. The U.S. government bumped up against that limit toward the end of January, prompting the Treasury Department to initiate a series of actions that are known as "extraordinary" measures and are intended to stave off a default.
The debt ceiling is the legal limit on the total amount of debt that the federal government can borrow on behalf of the public, including Social Security and Medicare benefits, military salaries and tax refunds.
CLICK HERE TO READ MORE ON FOX BUSINESS
House Speaker Kevin McCarthy has indicated that Republicans could push for spending cuts to the federal budget before helping to raise the debt ceiling.
However, McCarthy has vowed that GOP lawmakers will not touch Medicare or Social Security as part of broader budget negotiations or cuts.
- Pre-Markets
- U.S. Markets
- Cryptocurrency
- Futures & Commodities
- Funds & ETFs
- Health & Science
- Real Estate
- Transportation
- Industrials
- Small Business
- Personal Finance
- Financial Advisors
- Options Action
- Buffett Archive
- Trader Talk
- Cybersecurity
- Social Media
- CNBC Disruptor 50
- White House
- Equity and Opportunity
- Business Day Shows
- Entertainment Shows
- Full Episodes
- Latest Video
- CEO Interviews
- CNBC Documentaries
- CNBC Podcasts
- Digital Originals
- Live TV Schedule
- Trust Portfolio
- Trade Alerts
- Homestretch
You can still score a 2022 tax break with pretax IRA contributions — here's how to qualify
- There's still time to contribute to your individual retirement account for 2022 through the tax deadline — and possibly score a deduction.
- But eligibility for the tax break depends on your filing status, income and workplace retirement participation.
- Even if you qualify, you need to weigh whether a pretax IRA contribution makes sense for your goals, experts say.
There's still time to make a pretax individual retirement account contribution for 2022 — and possibly trim your tax bill or boost your refund — if you qualify.
For 2022, the IRA contributions limit was $6,000, with an extra $1,000 for investors age 50 and older, and the tax deadline this year is April 18 for most Americans.
You can make your 2022 IRA contribution through the April tax deadline in 2023, as long as you designate the deposit for tax year 2022. But you need to know the IRA deductibility rules before making a contribution, experts say.
More from Smart Tax Planning:
Here's a look at more tax-planning news.
- Here's how to get a faster tax refund
- When to expect key forms for filing your tax return
- Electric vehicle tax credits will be harder to get
"The deductibility rules for pretax IRA contributions can be confusing," said certified financial planner Kevin Brady, vice president at Wealthspire Advisors in New York.
That's because eligibility depends on three factors: your filing status, modified adjusted gross income and workplace retirement plan participation, he said.
How to know if you qualify for the tax break
Eligibility is simplest for a married couple filing together when both spouses don't participate in a workplace retirement plan, according to Julie Hall, a CFP at Vision Capital Partners in Ann Arbor, Michigan.
"They can both deduct and it doesn't matter what their income is," which may be appealing to higher earners, she said.
However, it gets more complicated if either partner has retirement plan coverage at work and participates in the plan. "Participation" may include employee contributions, company matches, profit-sharing or other employer deposits.
Depending on your filing status and income, you may be able to deduct all, part or none of your IRA contributions.
The 2022 income thresholds for IRA deductibility
"It's important to understand there are deductibility limitations," said Malcolm Ethridge, a CFP and executive vice president of CIC Wealth in Rockville, Maryland. With a workplace plan, some or all of your contributions may not be deductible, depending on earnings.
For 2022, single investors with a workplace retirement plan may claim a tax break for their entire IRA contribution if their modified adjusted gross income is $68,000 or less.
Although there's a partial deduction before reaching $78,000, the tax break disappears after meeting that threshold.
Even if you maxed out the plan at your current company, your income could still be low enough to make a tax-deductible [IRA] contribution. Malcolm Ethridge Executive vice president of CIC Wealth
Married couples filing together can get the full benefit with $109,000 or less in income, and they can receive a partial tax break before hitting $129,000.
You can see the full IRS chart for 2022 on IRA deductibility here .
"Even if you maxed out the plan at your current company, your income could still be low enough to make a tax-deductible [IRA] contribution," Ethridge said.
How to know if a pretax IRA contribution makes sense
Of course, just because you qualify for a deduction doesn't mean you should make the pretax IRA contribution, Hall said.
Before making the deposit, investors need to weigh their investment goals, along with their current tax brackets versus expected tax bracket in retirement, she said.
Plus, you may consider your other buckets of retirement savings — and the tax consequences upon withdrawal, such as capital gains, regular income taxes or tax-free income.
"Yes, you can benefit from the deduction today," Hall said. But you may opt for further tax diversification by adding more to another type of account, she said.
More In Smart Tax Planning
Biden will seek Medicare changes, up tax rate in new budget
President Joe Biden has started to unveil parts of his budget proposal being released later this week
WASHINGTON -- President Joe Biden wants to increase taxes to boost funding for Medicare and expand the program’s ability to negotiate lower costs for prescription drugs, according to advance details of his budget proposal being released later this week.
The Democratic president outlined his plan in a guest essay in The New York Times on Tuesday, writing that “Medicare is more than a government program. It’s the rock-solid guarantee that Americans have counted on to be there for them when they retire.”
Biden is scheduled to release his budget proposal on Thursday in Philadelphia. Pushing the proposal through Congress will likely be difficult, with Republicans in control of the House and Democrats with only a slim majority in the Senate.
The Medicare tax rate would rise from 3.8% to 5% on income exceeding $400,000 per year, including salaries and capital gains.
“This modest increase in Medicare contributions from those with the highest incomes will help keep the Medicare program strong for decades to come,” Biden writes in the Times.
The plan is also intended to close what the White House describes as loopholes that allow some income to avoid Medicare taxes.
Besides the taxes, Biden wants to expand Medicare's ability to negotiate drug costs, which began with the Inflation Reduction Act. He signed the sweeping legislation last year.
The changes would help shore up a key trust fund that pays for Medicare, which provides health care for older adults. According to the White House, the changes would keep the fund solvent until the 2050s, about 25 years longer than currently expected.
More changes would be made to Medicare benefits. Biden wants to limit cost sharing for some generic drugs to only $2. The idea would lower out-of-pocket costs for treating hypertension, high cholesterol and other ailments.
In addition, the budget would end cost sharing for up to three mental health or behavioral health visits per year.
Follow the AP's coverage of Medicare at https://apnews.com/hub/medicare.
Top Stories
2 Americans kidnapped in Mexico found dead, 2 found alive
- 11 minutes ago
4 Americans kidnapped in Mexico are identified
Gavin Newsom announces California is 'done' with Walgreens due to abortion pill
- Mar 6, 5:42 PM
Former SNL superfan who settled abuse lawsuit against Horatio Sanz tells her story
- Mar 7, 5:07 AM
A 'lifeline' for nearly 30M Americans is about to end
- Feb 28, 7:04 AM
ABC News Live
24/7 coverage of breaking news and live events
- Australia edition
- International edition
Starbucks to open 100 new UK coffee shops as tax bill on British sales falls
Investment suggests US-owned cafe chain will keep British arm despite report it was considering sale
Starbucks has revealed plans to invest £30m in the UK and open 100 new cafes, a year after it was reported to be considering selling the British arm of the coffee chain.
The investment plan came as the company reported it paid lower tax on its UK operations in 2022, even as gross profits surged, as royalty payments to other group companies expanded rapidly.
The coffee chain paid £4.6m in corporation tax in the year to 2 October 2022, compared with £5.4m the year before , according to its latest accounts.
Seattle-headquartered Starbucks had reportedly been considering selling the UK operation.
The chain appointed Laxman Narasimhan as its chief executive last year. Narasimhan, who had been chief executive of the FTSE 100 company Reckitt Benckiser, has been tasked by Howard Schultz, the coffee chain’s billionaire founder, with expanding Starbucks with a particular focus on the US and China.
However, the UK investment programme appeared to suggest Starbucks will hang on to its British cafes, which reported stronger financial results including revenues of £449m, rising above pre-coronavirus pandemic levels for the first time.
The UK subsidiary’s gross profits expanded to £129m, up from £95m. Yet those gross profits did not translate to higher profits before tax, as it paid £60m more for products and its staff bill increased by £26m. Royalties and licence fees, which it pays to other Starbucks companies, also grew rapidly, from £26.5m to £34.5m, reducing profits before tax.
The company noted a “challenging inflationary environment during the year”.
About 30% of Starbucks 1,066 cafes in the UK are operated by the company directly, while 70% are run as franchises by other businesses which pay to use the brand. The £30m investment will cover a three-year renovation programme for the company-operated stores, as well as some of the new openings.
Starbucks EMEA, the UK-based subsidiary covering Europe, the Middle East and Africa which receives the royalty payments, made a profit before tax of $76m (£63m).
It booked a charge of $19.5m for UK corporation tax compared with $13.2m in the year before. The company, which has built up $2bn in shareholders’ funds, did not pay a dividend to the US parent unlike in previous years.
after newsletter promotion
Campaigners have previously criticised Starbucks’s use of royalty payments, which can help to shift profits from one country to another. The company shifted the EMEA company to London after intense criticism .
Duncan Moir, the president of Starbucks EMEA, said: “While we are cautious about the macroeconomic environment, we will continue to invest to grow the region this year. We plan to open over 100 new stores in the UK and 300 new stores in EMEA, to continue this growth momentum.”
This article was amended on 6 March 2023. The headline was changed to clarify that it is the tax on British sales that has fallen, rather than Starbucks’ overall “British tax bill” as an earlier version said. And the main text was amended to add detail regarding the impact on profit figures of higher bills for products and staff.
- Food & drink industry
- Travel & leisure
- Tax and spending
‘It went down smoother’: Starbucks’ olive oil coffee approved in Milan
Starbucks launches extra virgin olive oil-infused coffee
From Slough to Seattle: the challenges facing Starbucks’ new boss
Starbucks ordered to reinstate US workers fired amid union campaign
Starbucks pays just £5m UK corporation tax on £95m gross profit
Starbucks to be led by Howard Schultz again as US workers push to unionize
Starbucks fires workers involved in union push as US movement gains momentum
‘Coffee-making robots’: Starbucks staff face intense work and customer abuse
Starbucks workers’ efforts to unionize finds success in Buffalo, New York
Starbucks launches aggressive anti-union effort as upstate New York stores organize
Most viewed.
- Give this article Give this article Give this article
Advertisement
Supported by
Biden Budget Will Propose Tax Increase to Bolster Medicare
The president’s plan targets Americans earning more than $400,000 a year in an attempt to increase the program’s solvency by 25 years.
Send any friend a story
As a subscriber, you have 10 gift articles to give each month. Anyone can read what you share.
By Jim Tankersley and Margot Sanger-Katz
WASHINGTON — President Biden, as part of his budget set for release on Thursday, will propose raising a tax on Americans earning more than $400,000 as part of a series of efforts to extend the solvency of Medicare by a quarter-century.
The president will also propose expanding that tax, which helps fund health care programs, to cover a wider swath of income, including some earnings by business owners that currently are not subject to it, White House officials said in a fact sheet released on Tuesday morning. Mr. Biden will also seek to broaden a measure, passed last year entirely with Democratic votes, that allows Medicare to negotiate the price of certain prescription drugs with pharmaceutical companies, which is projected to save the government money.
His plans are unlikely to become law. They are almost certain to be rejected by Republicans, who won control of the House in November and roundly oppose tax increases.
But in focusing on Medicare in the budget and before its release, Mr. Biden is seeking to sharpen a contrast with Republicans and cast himself as a protector of cherished retirement programs — both for his likely re-election campaign and for a looming congressional battle over raising the nation’s borrowing limit that centers on taxes, spending and debt.
“The budget I am releasing this week will make the Medicare trust fund solvent beyond 2050 without cutting a penny in benefits,” Mr. Biden wrote in an opinion piece for The New York Times on Tuesday. “In fact, we can get better value, making sure Americans receive better care for the money they pay into Medicare.”
Health Care in the United States
- Insulin Prices: After years of mounting pressure, the drugmaker Eli Lilly said that it would significantly reduce the prices of several of its lifesaving insulin products.
- The Cost of Miracle Drugs: A wave of innovative medicines promise to cure devastating diseases. But when prices are too high, patients have to hunt for other ways to pay .
- Medicare: The Biden administration announced a rule targeting Medicare private plans that overcharge the federal government. The change strengthens the ability to audit plans and recover overpayments.
- ‘Hospital at Home’ Movement: In a time of strained capacity, some medical institutions are figuring out how to create an inpatient level of care outside of hospitals .
For the first time this year, Medicare will begin regulating the price of prescription drugs, using new powers Congress gave it in the Inflation Reduction Act, the tax, health and climate bill Mr. Biden signed late last summer. The president’s budget highlights the substantial savings that the reforms are expected to generate over time.
The legislation allows Medicare to regulate the price of certain expensive drugs that have been on the market for several years. It also limits the amount all drug makers can raise prices each year. Those reforms will save Medicare about 160 billion over a decade, according to the Congressional Budget Office.
The changes to prescription drug prices accompanied changes to Medicare’s benefit that will also lower the costs of expensive drugs for its beneficiaries, by capping the total amount they can be asked to pay in a year for all their medicines and by limiting co-payments on insulin to $35 a month.
Mr. Biden will propose expanding the drug negotiations by allowing the government to negotiate over a broader universe of medication. The White House estimates that those changes and other tweaks to the drug negotiation provision will save the government an additional $200 billion over 10 years, which it seeks to direct to the Medicare trust fund. Medicare’s trustees estimate its hospital trust fund will be insolvent by 2028 without congressional action.
Republicans are unlikely to go along. They have tried to overturn the entire Inflation Reduction Act, including the drug negotiations, which some members of the party say will hamper innovation in the pharmaceutical industry. They have also sought to roll back Mr. Biden’s tax increases on corporations and high earners.
The president’s Medicare plan includes another increase, raising a Medicare-linked tax on people earning above $400,000 annually to 5 percent from 3.8 percent and broadening the income subject to that tax.
But Mr. Biden did not propose other major new policies to reduce Medicare’s spending on health care in the coming years. His proposal, like his previous budgets, omits a series of policies meant to reduce waste that were featured in budgets offered by President Barack Obama and President Donald J. Trump.
IMAGES
VIDEO
COMMENTS
Tax planning is the analysis of a financial situation or plan to ensure that all elements work together to allow you to pay the lowest taxes possible. Considerations of tax planning include...
Tax planning for a new business helps the entrepreneurs and the business personnel in attaining the financial goals. To conduct the business it is not only enough to invest a good amount of funds the organization is also required to maintain a positive flow of the money too.
What is tax planning? Tax planning is the systematic financial procedure to look at various taxation options to determine when, and in which way the business should be conducted so that the taxes can be eliminated or reduced legally.
Tax planning, on the other hand, involves using legal and effective strategies to minimize your risk and save money every year. Tax planning puts you in the driver's seat of your company's ...
Tax planning for new businesses refers to a systematic financial procedure surrounding the tax provisions of the country. The primary goal of the business should be to implement it in such a way that maximum tax liability can be reduced or entirely eliminated.
7 Tax Planning Strategies for Your Small Business - SmartAsset Tax planning can make a big difference for your business. If you're a business owner looking to minimize the impact of taxes, here's what you need to know. Menu burger Close thin Facebook Twitter Google plus Linked in Reddit Email arrow-right-sm arrow-right Loading Home Buying
Tax planning is an essential part of running a successful business. Keep reading for ways to minimize your small business taxes each year. The larger your business income, the more...
Answer (1 of 4): Tax planning is an effective way to streamline your finances. It is a concept that every individual, company, business implements as part of their financial strategy. Tax planning is an effective way to minimise your tax liabilities by the end of the year. It also enables you to ...
The business structure you choose when starting a business will determine what taxes you'll pay and how you pay them. Open All + Employer Identification Number (EIN) Income Tax Self-Employment Tax Employment Taxes Excise Tax Property Tax Sales and Use Tax Estimated Tax Estimated Taxes
Common business tax planning strategies 1. Business entity structure Each business entity and structure has its tax benefits and drawbacks. Let's look at sole proprietorship, for example. It's the most common type of business in the U.S., representing 73 percent of all businesses.
Tax planning is a legal approach to lowering the tax burden through tax benefits, deductions, and exemptions. It has three types, i.e., permissive, purposive, and short and long-range. It assists the taxpayers in obtaining tax efficiency by adequately planning their expenses and accumulating retirement savings.
Tax Planning and Reporting for a Small Business Participant Guide Small Business Financial Education Curriculum Page 5 of 18 Pre-Test Test your knowledge of tax planning and reporting before going through the course. 1. What is used to calculate the income tax obligation of a small business? a. Gross income b. Net profit c. Net Income d. Gross ...
Tax Planning Definition: Tax Planning can be understood as the activity undertaken by the assessee to reduce the tax liability by making optimum use of all permissible allowances, deductions, concessions, exemptions, rebates, exclusions and so forth, available under the statute.
Definition. Tax planning is a series of strategies for minimizing the percentage of your income that you must pay to the IRS. Generally, the higher your adjusted gross income (AGI), the more you pay in taxes. By tax planning, you have the opportunity to make changes during the year that lower your AGI.
As I pointed out earlier, founders whose businesses cannot make a profit and grow have been saying this for 20 years now. They are saying that we cannot make a profit, so accounting rules should be changed, and then we'll be able to show a profit. The comparison with a steel plant is quite ridiculous. A 115 years ago, when the first Tata ...
Tax planning is a financial process that helps individuals and businesses to minimise their tax liabilities by taking advantage of various tax laws.
As a small business owner, it is important to understand the importance of tax planning to maintain financial stability and growth. Tax planning involves anticipating and proactively making decisions about your taxes, rather than simply reacting to the tax laws at the end of the year. In this article, we will discuss the key strategies for tax planning for small business owners, including tax ...
CONCLUSION With proper tax planning new business can get advantages of tax exemptions, deductions, incentives, rebates and reliefs permitted under law. "MAKE IN INDIA" provides a red carpet for new venture grow, attracts massive FDI and it is awarded best investment promotion agency in 2016 in the world. Supporting government balanced ...
Tax planning analyzes a person's finances with the goal of achieving "maximum tax efficiency," according to Investopedia. The analysis considers many factors: Timing of income Timing of purchases Planning expenditures Retirement savings strategy Tax filing status and deductions
The tax planners can assist the business owners in computing the levied taxes and filing them. One more noteworthy importance of tax planning for the startup is attracting investments for the business. The tax planners are not only expertise in tax-related compliances, but they also analyze the business insights, financial stabilities and thus ...
The new federal tax brackets for Canadians in 2023. In 2023, Canada's federal tax brackets increased by 6.3% to account for inflation. Any Canadians earning less than $53,359 in taxable income ...
The planning done by the person to reduce his tax liability by making use of the allowances, deductions and other privileges available to him is known as tax planning. Every business registered under The Companies Act, 2013 is mandatorily liable to pay the tax accrued to them.
The proposal - part of the president's 2024 budget request set for release on Thursday - would raise Medicare taxes from 3.8% to 5% on annual income above $400,000, according to a White House ...
For 2022, single investors with a workplace retirement plan may claim a tax break for their entire IRA contribution if their modified adjusted gross income is $68,000 or less. Although there's a ...
The Medicare tax rate would rise from 3.8% to 5% on income exceeding $400,000 per year, including salaries and capital gains. "This modest increase in Medicare contributions from those with the ...
The investment plan came as the company reported it paid lower tax on its UK operations in 2022, even as gross profits surged, as royalty payments to other group companies expanded rapidly.
The president's plan targets Americans earning more than $400,000 a year in an attempt to increase the program's solvency by 25 years. Send any friend a story As a subscriber, you have 10 gift ...
Defintion, Types & Benefits. A 457 plan is a retirement plan for government and nonprofit employees that offers tax-advantaged benefits. Brian O'Connell. Mar 5, 2023 7:30 PM EST. Government ...