For many entrepreneurs, taxes constitute a challenging and often intimidating subject. While the majority tend to focus on tax preparation – the process of compiling and submitting tax returns – an approach that can have a much more profound impact on your business’s financial health is tax planning.

Tax planning is a proactive strategy aimed at minimizing tax liability by making full use of all available allowances, deductions, exclusions, and exemptions to reduce income and/or capital gains. In this article, we’ll explore why tax planning should be at the top of your priority list.

What Is Tax Preparation?

Simply put, tax preparation is the act of taking your prior year financials, putting them on a tax return and submitting them to governmental agencies (IRS and State).

Tax preparation is important and required by law but actual tax preparation provides little opportunity for reducing tax liability since it deals solely with historical data.

Most business owners when they think of taxes they think of tax preparation but in reality, tax planning comes first and then tax preparation is just the final act to button everything up.

What Is Tax Planning?

Tax planning is a proactive approach. It involves strategizing, projecting future earnings, and making decisions in advance to lower taxes. With tax planning, a business owner has greater control over their tax situation and can make changes that affect the company’s future tax outcomes.

Tax planning is done during the year, while tax preparation is completed once the year is over.

The Significance of Tax Planning

1. Reduction of Tax Liability
   • The main objective of tax planning is to legally reduce tax liability. By utilizing all available tax credits, deductions, and benefits, businesses can significantly decrease their tax obligations, thereby freeing up more funds for investment, expansion, or other business objectives.
2. Enhancement of Cash Flow
   • Effective tax planning can boost a company’s cash flow. By understanding when different tax obligations are due and planning accordingly, you can avoid penalties for late payments and manage your cash resources more effectively.
3. Facilitates Strategic Investment
   • Awareness of future tax implications can guide you in making more informed investment decisions. For instance, understanding the tax implications of capital gains or losses can influence your choices about what assets to buy, when to sell, and how to manage your portfolio.
4. Aids in Legal Obligation Compliance
   • Tax planning assists businesses in complying with their tax obligations. By understanding what taxes you owe, when they’re due, and how to minimize your liability, you can prevent legal complications and maintain a positive relationship with tax authorities.

Comparing Tax Planning and Tax Preparation

One thing we want to make very clear, it is not tax planning or tax preparation, it is tax planning AND tax preparation. As we constantly mention, unfortunately most people just think about tax preparation and do not spend any time on the tax planning piece. Our hope is that by reading this you understand that they are both vitally important and one should not be done without the other.

• Tax Planning
  • This is completed throughout the year. Most tax saving opportunities go away once 12/31 hits. Simply put, tax planning is the act of learning and implementing strategies that lower your tax liability.
• Tax Preparation
  • This is completed after year-end and simply the act of taking the information from the prior year and sending it up to the governmental agencies (IRS and State). This is required by law and cannot be overlooked.

Both are crucial, but tax planning comes first and tax preparation comes after!

How Do I Complete Tax Planning?

Here are some steps to take into consideration for effective tax planning:

• Listen to the Small Business Tax Savings Podcast Weekly
  • Shameless plug but this Podcast was built for YOU! All of my time and effort goes into ensuring small business owners like you are aware of the tax strategies that are available and this Podcast serves as my tool to deliver that. Listen weekly.
• Read the Weekly Blog Posts
  • Each episode we produce comes with an accompanying blog post. Therefore whether you prefer to learn via audible or visually or some combination of the two, we have an option for you.
• Watch TaxSavings TV 
  • If you prefer to watch instead of read or listen you can always check out our YouTube Channel which is Tax Savings TV!
• Join TaxElm
  • The ultimate resource for eliminating taxes and growing your wealth. With features like a custom tax plan, unlimited messaging access to tax experts, live consultations, bookkeeping analysis, monthly webinars, partner discounts, and a rich learning center, TaxElm is designed to help you pay less in taxes every year while expanding your business and personal wealth.
• Implement, Implement, Implement
  • Learning never stops but you need to do more than learn, you need to implement. If you find a topic that we talk on that really resonates with you, put it on your to-do to act on it while it is fresh in your mind.

Here’s my promise to you. If you start learning and thinking about tax planning you will set yourself up for success to make this the year you pay the least amount in taxes as legally possible. However you prefer to learn and implement we have a solution for you!

In conclusion, while tax preparation is a mandatory process needed to comply with the law, tax planning is a vital strategy to lessen tax liability and foster financial growth. It offers a proactive approach to taxes, allowing business owners to make strategic decisions that positively impact their future tax outcomes.

Hopefully now when you hear the word “tax” you think tax planning first and tax preparation second. Get listening and start implementing!