If you’re running a business, there are two fundamental processes that will play a huge role in managing your business’s taxes – tax planning and tax preparation. They may sound similar, but they are used for different purposes and occur at different points of the financial year. By understanding the difference between these two key elements of tax management, you can maximize your tax strategy, reduce liabilities, and ensure that you avoid costly surprises.
What is Tax Planning?
Tax planning is not something done at the end of the year, but a proactive, year round process of strategically organizing your financial affairs to pay the least amount of tax. The idea is to develop a whole strategy that lets you use all the tax deductions, credits and deferrals to pay as little in taxes as possible.
Key components of tax planning include:
• Timing income and expenses: Changing how you get paid or pay bills to maximize your taxes.
• Choosing the right business structure: Choosing the best tax efficient business structure (LLC S-Corp, C-Corp etc.).
• Maximizing deductions and credits: Finding all of the tax deductions and credits your business and personal tax returns qualify for.
• Retirement and investment planning: Investing in tax advantaged retirement accounts and investments.
• Minimizing capital gains taxes: The sale of assets to avoid tax liabilities.
When should tax planning occur?
Tax planning is a year round process and not something to think about when it’s tax season. Staying proactive can help you manage cash flow, prevent tax surprises, and put your business in the best financial place possible at the time you file your tax return.
What is Tax Preparation?
Tax preparation, in contrast, is the act of gathering and inputting the information from your previous year into your tax returns. This usually happens during tax season (which is January through the filing deadline, typically April 15).
Tax preparation is designed to help your business file an accurate, on time tax return that complies fully with federal, state, and local tax laws. Key components of tax preparation include:
• Gathering financial records: Gathering income statements, expense records, payroll documents and other financial data.
• Completing tax forms: Filing tax forms such as 1040, 1120, or 1065 depending on your business structure.
• Ensuring compliance: Reviewing tax laws and making sure all credits, deductions and filing requirements are met.
• Calculating tax liability: How much your business owes in taxes for the year.
• Submitting tax payments: Filing the tax return and paying any remaining taxes by the deadline.
When should we carry out tax preparation?
Usually, tax preparation is a once a year event, beginning in January when the previous year’s financial records become available. It’s a once a year task, but to do it thoroughly and accurately, you need to have your financial records organized and a solid tax planning strategy throughout the year.
The Key Differences Between Tax Planning and Tax Preparation
Tax planning and tax preparation are both related to taxes but they serve different purposes and at different times. Tax planning is a year round process that helps you organize your finances and reduce the amount of tax you pay. Tax preparation occurs once a year, during tax season, to complete your tax returns and file them on time.
The main difference lies in their purpose and timing.
1. Timing:
• Tax planning is a year-round process aimed at optimizing your financial strategy and minimizing your tax burden.
• Tax preparation happens once a year, during tax season, to ensure that your tax returns are completed accurately and filed on time.
2. Goal:
• Tax planning focuses on future tax savings, looking ahead to reduce liabilities and maximize deductions for the current and future years.
• Tax preparation is about compliance, making sure your business adheres to tax laws and regulations by accurately reporting income and expenses for the previous year.
3. Approach:
• Tax planning involves strategic decision-making around income timing, investments, business structure, and deductions to minimize your overall tax burden. • Tax preparation involves compiling financial records, completing tax forms, and ensuring that everything is in order for filing.
4. Who Handles It:
• Tax planning is usually conducted with the help of a financial advisor or tax planner throughout the year to optimize tax strategies.
• Tax preparation is often handled by a tax professional, such as a CPA, during tax season to ensure accuracy and compliance.
Why You Need Both for Business Success.
Tax planning and tax preparation are both important to your business’s financial health. Proactive tax planning is an effective way to manage your tax obligations throughout the year, reducing your liabilities and planning for the future. If you don’t have proper tax planning, you could miss out on significant tax savings opportunities.
On the other hand, tax preparation ensures that when tax season comes your business is tax compliant and all financial records are accurately reflected in your returns. Getting tax preparation done properly can help you avoid penalties, audits, and other legal problems that might cripple your business.
To get the best results, tax planning must be ongoing and tax preparation must be accurate. By doing this, you will be able to make the most of all tax saving opportunities throughout the year and when tax season rolls around, file your returns with confidence.
How Synergy Can Help
At Synergy we provide complete tax planning and preparation services to keep your business in the best financial situation at all times. You can take advantage of opportunities for tax savings, plan for the future and be compliant with the latest tax laws thanks to our proactive approach. Our team of experts is available to provide you with year round support or help with filing your taxes. Find out more about how we can work with you to create the most effective tax strategy for your business, by contacting us today!