Table of Contents
- What Is Tax Planning?
- 7 Best Practices for Tax Planning
- Streamline Your Tax Planning Process with Automated AR
Key Takeaways
- Tax planning reduces liability by optimizing deductions, credits, and tax-efficient investments.
- There are four key tax variables: entity type, time period, jurisdiction, and transaction character.
- Best practices include record-keeping, understanding tax brackets, and planning major purchases.
- Automating AR simplifies tax prep by ensuring accurate financial tracking and compliance.
Tax planning for businesses is complicated, which is why most organizations either outsource to a professional bookkeeper and tax accountant or retain a tax compliance specialist in-house. Regardless of how your organization manages its taxes, knowing how they function can help you support your tax team while incorporating savings into your long-term strategy.
In this article, we’ll cover the key aspects of tax planning, its definition, common examples, and best practices for preparing for tax season.
What Is Tax Planning?
Tax planning is the process of identifying cost-effective tax strategies ahead of time to maximize savings. Typically, a tax professional or accountant helps companies streamline their business.
There are four key objectives to tax planning:
- Reducing tax liability
- Ensuring compliance
- Maximizing savings
- Facilitating growth
The most common way for businesses to achieve this is through a tax planning arrangement.
What Is A Tax Planning Arrangement?
A tax planning arrangement occurs when a company attempts to remain in a specific tax bracket to minimize taxes. This can be done through strategic purchases, income timing, and investments.
What Are The 4 Basic Tax Planning Variables?
There are 4 primary tax planning variables. As variables, their attributes will change from business to business. But every tax plan should include them:
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Entity variable: This variable asks who is filing. Is it a single business owner using a pass-through entity, or an S corporation, for example.
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Time period variable: This highlights that a dollar paid in taxes this year could be worth more than what is paid in the next.
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Jurisdiction variable: This covers the area of authority in which the taxes occur. This normally involves federal, state, and local jurisdictions.
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Character variable: The character of the tax transaction depends on the type of income or expense.
3 Types Of Tax Planning
How you plan for tax season will largely depend on your objectives. That said, there are four general types of tax planning:
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Short-term: This type of tax planning emphasizes short-term savings, such as minimizing quarterly or annual taxes. Certain strategies may be part of a longer investment strategy, such as determining whether short-term or long-term capital gains taxes make sense for the current fiscal year.
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Long-term: Long-term tax planning is often a multi-year approach. This type of tax planning aims to lower your overall tax liability over a long period of time, such as the next five years.
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Investment-based: Investment-based tax planning considers forms of investment income and those specific tax regulations.
Once you refine what time period and asset type you are planning for, it’s easier to navigate tax planning strategies.
Examples Of Common Tax Planning Strategies For Businesses
Which tax planning strategy your company uses to reduce its liability depends on your specific situation. That said, there are several common ways to reduce your taxes:
- Retirement contributions: These are commonly tax deductible, including matching and administrative fees. In some cases, retirement spending for employees may be a tax credit. Some businesses can leverage profit-sharing contributions of up to 25% of payroll to further lower taxable income.
- Tax-efficient investments: There are a variety of options here. The most common is tax-loss harvesting, or selling investments at a loss to offset taxes. You can also leverage tax-exempt municipal bonds.
- Charitable donations: These can reduce costs in both short-term and long-term strategies, whether through a specific fund or regular giving. This approach also provides a reputational benefit and can drive revenue and brand trust. However, there are limits. Organizations can leverage tax-deductible donations for up to 25% of the company’s reported revenue.
- Tax credits: These can rotate based on government priorities, so it's helpful to stay ahead of what could reduce your taxes. For example, installing solar panels in the past has enabled companies to offset costs.
- Expense tracking: Finally, tracking expenses can help you better note what you can write off on your taxes for regular deductions. Things like employee salaries, office supplies, and similar items can all reduce your tax liability.
7 Best Practices for Tax Planning
Many tax deductions, credits, and dates may change from year to year, so following a 2025 guide word for word may not work 5 years down the road. That said, there are some practices that you can use every year to optimize your tax planning process.
1. Know When To Submit Taxes
As most business owners know, the IRS has a specific quarterly schedule for filing business taxes: April 30, July 31, October 31, and January 31.
It is critical to ensure that your tax team or professional submits your return by these dates to avoid penalties and extra costs.
2. Understand Your Tax Bracket
The first element of successful tax planning is understanding your tax bracket—even as a business. Solopreneurs and small businesses can often get by using a personal tax bracket when registering their business at a pass-through entity, either as an LLC or as self-employed. However, S and C corporations have their own tax rate.
For example, C Corps can expect a flat rate of 21%. Long-term capital gains and qualified dividends for corporate gains are taxed at the same rate. Depreciation rules, in particular, can provide critical savings.
3. Tax Deductions vs. Tax Credits
To best balance your taxes, it’s important to understand the difference between deductions and credits. A deduction will reduce your taxable income, while a credit is a dollar-for-dollar reduction of money owed.
4. Standard Deduction vs. Itemizing
For many businesses, itemizing deductions makes more sense than standard deductions. This is because they may have a wide array of vendors and service professionals that may count toward deductions.
5. Keep Good Records
Record keeping is essential for keeping any business solvent—not just compliant. Maintaining clear expenses and invoicing records can streamline the tax process and ensure you have protection against surprise audits.
6. Adjust Your W-4
Correct W-4 filing is critical for successful and seamless tax planning for businesses. A W-4 notes your tax withholding for employees. It can be helpful to track and adjust W-4s annually and during employee life event changes.
7. Plan For Major Purchases
With a sound procurement team, it’s possible to plan major purchases and investments ahead of time to ensure you can leverage specific tax savings at certain times. Determining tax-qualified purchases ahead of time should be a critical part of your expense management process.
Streamline Your Tax Planning Process with Automated AR
Tax planning is a regular event—but it doesn’t have to be overwhelming. Automating your AR process can streamline income tracking and make it easier than ever to prep for the season. An automated accounts receivable system that syncs with your ERP and accounting software in real time ensures that you are compliant and always ready to pull documents to file.
Discover how you can leverage AR Automation and implement it effectively in our Guide to Choosing the Best AR Automation System for your business.
