TAX PLANNING
There are numerous tax planning strategies, but ultimately they fall into one of three categories.
One category of tax planning strategies has a permanent impact the amount of tax paid. These strategies include taking advantage of tax credits or special incentives. In some cases it involves identifying overlooked deductions. Amongst strategies in this category, one strategy has a greater potential for permanently reducing your taxes than all the rest: Choice of Entity. The type of business you own, from a legal standpoint (i.e., Sole Proprietorship, Partnership, Corporation or Limited Liability Company).
A second category of tax planning strategies has an impact on when tax must be paid. These strategies affect the timing for recognizing income or expense for tax purposes. In other words, a timing strategy will influence in what tax year you must recognize income or are permitted to deduct an expense. In today’s cash-constricted environment, liquidity and cash flow have become more critical than ever to a company's ability to survive and thrive. Even if cash flow is not a major consideration for your company, would you rather pay $1,000 today, two years from now or ten years from now? Considering that there is no return on investment for taxes paid, most companies would choose to delay that tax payment as long as possible.
A third category has strategies that affect the character of the income or expense. These strategies determine whether an item of income or expense is “ordinary” or “capital” in nature. The IRS has very specific rules that segregate the calculation of ordinary income from capital gain. The character of an item is important because it can determine both the amount of tax owed (generally capital gain is taxed at a much lower rate) and the timing for when the item is recognized for tax purposes. So in this respect these strategies are not a separate category at all, but an amalgamation of the previous two categories.
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