The most successful business owners have a clear understanding of the difference between tax planning and tax prep.
Both types of financial management are valuable to companies of any size. Over time, the implementation of these two concepts is often the difference between a successful, growing company and a struggling company.
However, they are two very different processes and both can and should play a role in the day-to-day operations of businesses.
What Is Tax Prep?
Business owners engage in tax prep as a way to prepare for tax filing. It’s the act of getting together all of the reports and documents necessary for filing. Once you’ve compiled your necessary documents, you’ll need to crunch the numbers and complete each of the tax forms required to properly file taxes. You can also include filing taxes as a component of the tax preparation process as a benchmark for completion.
Look at tax prep as the right here, right now act of managing taxes. It is focused on the current situation and current tax-filing needs for the company. It’s not very future-oriented but it is essential for ensuring your taxes are done correctly.
Why Is Tax Prep Important?
Tax prep is an essential part of doing business. It’s required by law in most cases. The key, however, is ensuring your tax prep is accurate and thorough. This means eliminating errors or omissions on tax documentation when filing, as it can create financial concerns and limitations for companies.
Properly executed tax prep ensures everything is correct on your tax documentation before it is sent to the IRS. If your tax prep falls through the cracks, resulting in late filing or inaccuracies, it can lead to fines and other legal concerns.
What Is Tax Planning?
Tax planning is a long-term, zoomed-out view of taxes. It compiles a year’s worth of tax strategies and instead of focusing on the “right now”, it looks towards the future.
Compared to tax prep, tax planning is a much higher and more thorough process. It takes managing your taxes to a whole new level.
Usually put in place at the beginning of the year, it is a combination of strategies used to ensure tax prep goes well later. It is a critical investment for most businesses to ensure taxes are reported accurately, but it looks at more than just managing tax documents. Rather, it acts as a guide to:
- Managing your money throughout the year.
- Making financial decisions with your taxes in mind.
- Optimizing tax savings.
When you use your tax plan as a point of reference, you can reap each of the benefits above and have a good understanding of what to expect when it’s time to begin tax prep.
Key Elements of a Tax Plan
Tax plans are often customized to fit the specific needs of the business. Some of the key elements of a good tax plan include:
- Deductions: Deductions are a way to reduce how much of the money generated by the company is subject to tax. By lowering your tax liability – what is subjected to taxes – you end up paying less tax overall.
- Timely income collection: Businesses can benefit from collecting income at certain points throughout the year. For example, if it’s the end of a quarter and you’re looking to save on taxes, consider sending invoices until the beginning of the next quarter. This would let you collect income later and not have to pay the taxes on it in the current quarter.
- Calendar of due dates: This outlines when payments are due. It is essential to know what you owe and when you need it. Late payments often have fees.
- Asset protection analysis: As a business owner, your assets are completely intertwined with your livelihood. With proper planning, you can take protection to know what’s at risk, and ensure confidence around your assets.
- Wealth management review: Tax planning is more than minimizing obligations. You should have a proactive plan to achieve your goals in business, and your personal wealth.
Why Is Tax Planning Important?
A tax plan shows you places where you can save money and works as a guide to reducing tax obligations. Tax planning drives cash flow, ensuring your company has access to the funds it needs to pay employees and business debts.
With a proper tax plan in place, you can see how your cash flow affects your taxes and make important decisions over time with the sole goal of reducing what you owe.
How the Right Accountant Can Help
Tax planning and tax prep can easily be confused and on top of that, neither of them is easy to do on your own. The right accountant will help you build a tax plan to make the tax prep process easier to manage, more efficient, and accurate.
At Phillips CPA, we will ensure you have all of the pieces together to optimize your business and save money. Learn more about how we can help you by giving us a call today.