Tax and Business Strategy is an essential tool for ensuring success in one’s business and to minimize one’s tax bill. Efficient tax planning should be a year-round event in the running of the business as it can help reduce tax obligations and anxiety related to paying up of taxes on time. With business strategies continually evolving in the face of increasing national and international competition, tax planning is occupying a central role in formulating business strategies. Tax planning is relevant in cases of surviving an audit, capitalizing on business deductions and engaging a friendly tax regime to run a business. Tax and business strategy can be defined as an interdisciplinary field studying the effects of tax planning on the business strategy for a firm, business or organization and how business strategies can be molded to ensure that the burden of taxes does not take a heavy toll on the productivity of the business. In short, planning of taxes should be done in an efficient manner so as not to jeopardize the business goals of expansion, profits and growth.
Tax planning can be defined as systematic analysis of different tax options such as to minimize the tax liability in the present as well as future periods. Minimizing the tax liability can provide more funds for the running of a business and it can especially be useful in case of small businesses in need of more money than established firms or organizations for expansion of their activities. This source of increased funds can be utilized for larger expenses as a form of investment or even as a source for working capital. Deferring taxes is often a most popular way of tax planning as it allows the business to use the money interest free and sometimes even earn interest on the money until the next time when taxes will be due. Some of the general issues covering tax planning are choice of accounting and inventory valuation methods, the timing of purchase of necessary equipments and selection of tax-favoured benefit plans and investments.
Tax accounting implies the basic rules and guidelines which are used in preparing financial records and reports for the businesses which can be done in two ways: namely accrual and cash basis. These will generally affect the amount of taxes owed by businesses in a given year. Accounting methods using the accrual basis recognizes the income and expenses in the period to which they apply rather than according to the real-time cash flow used in accounting techniques according to the cash method.
Tax accounting in the cash method recognizes income when it is actually earned and expenses are recorded as they are paid in contrast to the method of accrual where expenses are recorded as they are incurred. Although the cash method is less complex than the accrual method of accounting and provides a more accurate picture of cash flow, the accrual method is more precise on how the business is performing in the long term. It may also lead to favorable results for corporations, which have few receivables and consequently a large amount of current liabilities.
Inventory valuation is defined as valuation of remaining inventory at the end of the year so that the amount deducted from income for inventory purchase can be lowered so as to reduce the amount of tax owed by the businesses.
Tax and business strategy will be different for small businesses to sole proprietorships and partnerships to large corporations. Tax planning for sole proprietorships is very similar to individual taxes as the owners of the business are organized as sole proprietors and many partnerships are required to pay personal income tax rather than business income tax. As for corporations they are very different than sole proprietorships as profits accrue to the corporations who are separate entities by law. Corporate taxes are imposed upon them and they also have to file annual corporate tax returns.
Tax and business strategy effectively means that to organize tax payment in such a manner so as to carry out the business strategies of product development, marketing and product diversification in an unprecedented manner keeping in mind the tax cuts implementations for different businesses as also for businesses at its stage of initiation or for companies who are established.