10 Oct Tax Planning: Why is it so Important?
Tax refers to the extra cost applied to the initial expenses of a company. Higher initial expenses translate to higher taxes. Hence, the simplest way to reduce the taxes is to decrease the initial expenses of the company.
The tax administration of a company handles tax management. Tax planning is a method of tax reduction performed by an individual or an organization. Its goal is to reduce the taxes to an acceptable value. In this way, the company can achieve higher business profitability.
This method involves scanning through the financial profile of a company. The tax administration team weighs the significance of each type of expenses. The team removes the less important expenses to reduce the taxes.
Tax planning can be a tedious task. Yet, most companies conduct tax planning for it has a lot of advantages. Given below are the expected advantages of tax planning:
Cut expenses
The main goal of tax planning is to cut the company’s expenses such as taxes. Through tax planning, the company can identify investments with low profitability. The team creates resolutions to improve the profitability of these investments.
A breakeven point is a condition wherein the company neither gains nor loses money. If breakeven point is not reached, the company may check their activities. Afterwards, they can form resolutions to address the problem. If the investment does not produce profit, the company must reinvest their money. A problem may have existed between the planning and implementation. The tax administration team must perform an evaluation of the company’s activities. In this way, the team would determine the causes of its non-profitability.
Adapt to Annual Tax Changes
The annual tax of a company may vary depending on the material costs and fluctuating demands. The government may revise the tax laws every year. The company can adjust its activities to adapt to annual tax changes. These adjustments may include changes in the number of raw materials and products.
Deferring taxes
Another way to reduce expenses is to practice tax deferral. It involves delaying the payment of taxes for the current year. This method is applicable to companies with an income deposited in a bank. The tax is only applied after withdrawing the money from the bank. Hence, the timing of withdrawal is important. The company must withdraw the money when the taxable income becomes low enough.
Tracking progress
Tax planning has a direct relation to financial planning. Through tax planning, the team gets to know the progress of the company. It requires an analysis of the different activities. It also evaluates the activities’ profitability and economic growth. Also, it considers the strengths and weaknesses of its components. Tracking progress is critical so you don’t end up with bad credit loans for your business. In effect, the company can address the arising problems as early as possible.
Several Tax Alternatives
It involves choosing from several tax alternatives. The best choice has the lower required investment to run a business. The team conducts tax planning once a year. The planning must begin after the submission of annual tax documents.