What is tax planning? What are characteristics and types of it?

Tax Planning can be understood as the activity undertaken by the assessee to reduce the tax liability by making optimum use of all permissible allowances, deductions, concessions, exemptions, rebates, exclusions and so forth, available under the statute.

Types of Tax Planning

1. Short-range and long-range Tax Planning: The tax planning which is made every year to arrive at specific or limited objectives, is called short-range tax planning. Conversely, long-range tax planning alludes to such practices undertaken by the assessee which are not paid off immediately.
2. Permissive Tax Planning: Tax planning, wherein the planning is made as per expressed provision of the taxation laws is termed as permissive tax planning.
3. Purposive Tax Planning: Purposive tax planning refers to the tax planning method which misleads the law. Under this type, there is no expressed provision of the statute.

Tax planning means intelligently applying tax provisions to manage an individual’s affairs, in order to avail the tax benefits based on the national priorities, in accordance with the interest of the general public and government.

 

Objectives of Tax Planning

• Minimal Litigation: There is always friction between the collector and the payer of tax. In such a situation, it is important that the compliance regarding tax payment is followed and used properly so that friction is minimum.
• Productivity: Among the most important objectives of tax planning is channelization of taxable income to various investment plans.
• Reduction of Tax Liability: As a tax payer, you can save the maximum amount from payable tax amount by using a proper arrangement of your enterprise working as per the required laws.
• Healthy Growth of Economy: The growth in an economy depends largely upon the growth of its citizens. Tax planning estimates generation of white money that is in free flow.
• Economic Stability: Stability is supplemented when the tax planning behind a business is proper.

 

Ten Characteristics of Good Tax Planning

• Some of the best tax plans originate with client generated ideas. Taxpayers who inform themselves about the basic tax laws and start brainstorming or passing ideas by their tax advisor typically end up with excellent tax results.
• A tax advisor who is curious and asks questions about your information is likely a competent tax advisor. This is the same person who probably has been to your business and wants to know what you have planned for the upcoming year and can offer suggestions while discussing your circumstances.
• Typically there is not one single tax saving strategy that reduces your taxes, but rather it is a combination of several techniques that produces good results. For example, wisely using accelerated depreciation methods while taking advantage of tax credits can produce a low tax burden in year #1 which also reduces estimated tax payments for year #2.
• Many good tax results are from a tax advisor who explains why an area of the tax law is not clear cut and is able to offer the client options on how to proceed. There are circumstances where both the taxpayer and the IRS can be correct. Many times a good tax result is from taking a justifiable position, even though the IRS could assert tax law to the contrary.
• Good tax planning does not waste tax deductions. There are circumstances when a taxpayer should not take a deduction in year #1 because the tax savings is not as great as it could be by saving the deduction for a later year. Some deductions are deferred by making elections while others are deferred by delaying expenditures.
• Sometimes the focal point of a good tax plan is simply deferring paying the taxes. For example, there are circumstances where taxes are going to be due, but flexibility exists in timing the year they are due.
• Good tax planning sometimes dictates paying some taxes now because paying now will be less expensive than paying in a latter year. This is especially true when a taxpayer is currently in a low bracket year. In these cases, the optimal tax strategy may be to recognize income earlier than what you originally planned or delaying an expenditure.
• Sometimes losses, especially flow-through losses from partnerships and S corporations, are not deductible in the year incurred. Good tax planning can help determine the best year to deduct losses. A similar theory applies to capital loss carry forwards.
• Tax planning should also consider how to reduce payroll and self-employment taxes.
• Good tax planning always considers the non-tax aspects of the circumstances and merges tax laws with financial prudence.

 

Tax Planning Strategies

Any successful tax planning strategy centres around three themes; reducing income, increasing deductions and utilisation of the lower tax rates available.

Below are some of the more common strategies employed to assist in Tax Planning.

Making Deductible Superannuation Contributions

This can be done either by a salary sacrifice arrangement, (if an employee) or claimed as a tax deduction by a self-employed person. As your superannuation fund only pays 15% tax on the contribution you have effectively shifted a portion of your business profits into a lower taxed environment.

There are limits however on the amounts for which you can contribute and claim a deduction. In 2013/14 those under 59 years of age at 30 June can only contribute $25,000 and those over 59 can contribute $35,000. Exceeding these amounts could result in an additional tax being levied on the excess, so care needs to be taken.

Review and Write off any Bad Debts

As you are entitled to a deduction in the year your write off a bad debt, identifying bad debtors and writing them off is an easy, cost effective strategy and should be done on a regular basis.

However, in order to receive the deduction, there must be no prospect of recovering the outstanding debt and if it is later recovered, it must be included as assessable income.

Review Timing of your Invoices

Whilst it is always a good idea to prepare and send out interim invoices for work partially completed, care should be taken especially if an interim invoice is going to be raised close to 30 June and the work will be completed early July. In this scenario, it may be prudent from a tax perspective to invoice for the completed job in July, (and have the income assessed in the following financial year) rather than have a part of the income assessed in the current financial year.

Review your Inventory at Year End

Many businesses fail to review their inventory, in particular for either obsolete or damaged items. These items generally have significantly lower values than current or undamaged stock, yet they are still valued at their full value. By revaluing these items, you can create a further deduction for your business.

Small Business Concessions

For business with an aggregated turnover of less than $2 million, there are various concessions available relating to deductions you can claim, in particular:

Trading Stock Rules:  If the change in value of stock from the previous year is less than $5,000, there is no requirement to record this as income in the current financial year, providing an opportunity not to record an increase in stock values if it is less than $5,000.

Prepayments:  By prepaying expenses which are for the next twelve months now, (e.g. insurance, subscriptions, registration etc.) you can claim a tax deduction for the entire expense in the current financial.

These are just some of the more common tax planning strategies available. Any strategy undertaken should be done in consultation with your accountant to ensure that it fits with your overall goals and objectives.

 

Corporate Tax Planning

This is a way of lowering the liabilities on a registered company. One of the most used methods is by including the deductions on business transport, health insurance of employees, etc. With tax deductions and exemptions provided under the Income Tax Act, 1961, your enterprise can largely reduce its tax burden in a legal way.

Rising profits of an enterprise means higher liabilities of tax. In such a situation, it is important that they dedicate enough time on tax planning that reduces liabilities. With a tax plan, both direct tax and indirect tax is lessened at the time of inflation. Not just this.

Tax planning means a proper planning of:

• Capital budget.
• Sales and Marketing costs.

Bookkeeping: How to Keep Records for Your Small Business

It’s true that doing your own bookkeeping can be a complete nightmare. Whether you’re starting a new business or have been running an online store for years, learning how to track your expenses and revenue can feel like a huge challenge.

You’re not alone. Nearly three-fourths of small business owners feel they are not very knowledgeable when it comes to bookkeeping and accounting.  On top of running your business, you also have to manage an asset account, tax returns, credit card chargeback, and more. It can be confusing and overwhelming if you’re diving in for the first time. But it doesn’t have to be.

What is bookkeeping?

Bookkeeping is the process of recording and managing all financial transactions for your business, including sales, purchases, and payments. Bookkeepers track all costs and income, to help a company make informed financial decisions.

The basics of bookkeeping

In business bookkeeping, an account is a record of all debit and credit entries of a certain type, such as accounts payable or payroll.

There are five basic types of accounts:

Assets. Resources or things of value owned by a company as the result of its transactions (e.g., inventory, accounts receivable).

Liabilities. The obligations and debts owed by a company to suppliers, banks, lenders, or other providers of goods and services (e.g., loans, accounts payable).

Revenues or income. Money earned by the company through sales or providing a service.

Expenses. Cash that flows out of the company to pay for assets or services (e.g., utilities, salaries).

Equity., The remaining value of an owner’s interest in a company, after all liabilities have been subtracted(e.g., stock, retained earnings).

 

Things New Business Owners Should Know About Bookkeeping

Whatever your trade may be in the small business world, you probably love the type of work you get to wake up and do each day. Or, perhaps you’re still transitioning into a true entrepreneurial lifestyle.

While self-employment can be a breath of fresh air, there are likely some tasks you just plain can’t stand, such as bookkeeping. To help make the process of tracking your business finances a little easier, consider the following bookkeeping concepts for new business owners.

Maintaining well-organized business financial records is a must.

You must always maintain a solid recordkeeping system that contains all of your business financial files — invoices, bank statements, receipts, previous years’ tax returns, and the like.

It’s imperative to categorize your business income and expenses.

How can you gauge the true growth of your small business over time? The answer comes via good bookkeeping.

Reporting all relevant sales tax information is critical.

There are numerous business tax filings you must make when diving into formal entrepreneurship, but one critical requirement many newly crowned business owners overlook revolves around sales taxes.

 

Things Only Students of Accounting Programs Will Understand

It takes a special kind of person to become an accounting professional. You must be willing to learn new topics, work with software, use basic math every day, be a problem solver, and communicate well with people. Not everyone is up to the task of learning accounting and working in the field, but if you are, you have a great future ahead of you.

Once you join the accounting club, you will be one of a limited number of professionals who  know what it’s like to feel the joy of creating a spreadsheet, to revel in working with numbers every day, to learn and use new software programs, and best of all to have a career that is not limited. You are joining a group of professionals who are ambitious, driven, and who earn a great living working in accounting

Math is everything.

You never thought you would say this, but now that you have worked on an associate degree in accounting, you understand the truth: math is really everything. It’s all about numbers. When you study accounting your life becomes nothing but numbers. They tell the story behind a business, a spreadsheet, tax returns, and audits are so important in accounting programs and coursework.

A spreadsheet is your best friend, or your nemesis.

Underneath it all is math, but on the surface you will be working with spreadsheets, all the time. This type of software will become your new best friend, but at times it will also be your enemy. All students of accounting programs understand the joy that comes with creating a perfect spreadsheet, one that actually works, with no errors, with totals that actually make sense. Creating such a perfect spreadsheet will make your day.

You know where you’re going after finishing accounting programs.

So many students pursuing higher education have no path. They go to college because they know it’s what they’re supposed to do. They major in communications, psychology, or art history, with no real thought for where those degrees will take them. Accounting students are different.

 

What Does a Bookkeeper Actually Do?

Whether you sell handmade alpaca socks, enterprise software, or legal advice, there are two things we can guarantee about your business: you earn money and you spend it. Bookkeepers are the ones who help you keep track of all that.

If all your mental powers have been focused on getting your business off the ground, you might not fully understand what a bookkeeper does. In this guide we break down the day-to-day role of a bookkeeper, and why a good one is worth holding onto.

Bookkeepers, defined

A bookkeeper is someone who prepares your accounts, documenting daily financial transactions. Bookkeepers have been around as far back as 2600 BC—when records were tracked with a stylus on slabs of clay—making bookkeeping not the oldest profession, but pretty darn close.

A (very) brief history of bookkeepers

In colonial America, bookkeepers would record transactions in a “wastebook”—so called because the data would eventually find its way into an official ledger and the original book would go into the trash.

Bookkeepers vs. Accountants

There are some financial tasks that bookkeepers aren’t equipped for; that’s where accountants come in. While bookkeepers record daily transactions, accountants use the information compiled by a bookkeeper to produce financial models. Bookkeeping is straightforward and transactional, while accounting is more subjective and calls for skilled interpretation—like helping you understand when it’s time to incorporate, or filing your taxes to get the best return possible.

 

Bookkeeping Basics for Entrepreneurs

Bookkeeping is the process of tracking all of your company’s financial transactions, usually by entering them into accounting software or a physical set of “books.” It lets you see exactly where your business is spending money, where your revenue is coming from, and which tax deductions you’ll be able to claim.

You need it to do your taxes

You need to know your net profit in order to do your taxes, and to figure that out, you need to know your total income and expenses. And the only way to know that for sure is to have accurate, up-to-date books.

ou need it to borrow money

If you need to borrow money from someone other than friends and family, you’ll need to have your books together. Doing so lets you produce financial statements, which are often a prerequisite for getting a business loan, a line of credit from a bank, or seed investment.

It tells you where your money is going

Getting your books together and producing financial statements is the only way to gauge the financial health of your small business.

t helps you catch errors quickly

If you wait until the end of the year to reconcile or get your financial transactions in order, you won’t know if you or your bank made a mistake until you’re buried in paperwork at tax time. Regularly organizing and updating your books can help you catch that erroneous overdraft fee today, rather than six months from now, when it’s too late to bring up.

tips for choosing the right bookkeeper

Organised, process driven and efficient

A good bookkeeper must understand your industry, your business processes and your requirements so they can hit the road running.

Ethics and trust

This is paramount. Both parties need to feel comfortable with one another in order to build a relationship based on trust. It is important to provide all the correct information to your bookkeeper so they can keep accurate up to date records for you. It would make good business sense to protect yourself by having a confidentiality agreement in place.

Up-to-date technical knowledge

Up-to-date software knowledge is a must. Bookkeepers who are familiar in using online accounting software can automate many processes and reduce the amount of time spent on data entry.

Communication skills

This is essential to keep the lines of communication. Your bookkeeper must be aware of the business operations, goals and issues to do their job correctly. The ideal must have the ability to enhance relationships with managers, customers, suppliers and staff alike.

Ask questions

A great bookkeeper asks relevant questions. He or she will also share ideas with the business owner regarding financial-planning strategies, ways of increasing revenue, cash flow, budgeting and many other cost-saving strategies they can come up with to increase business performance and growth. With a good understanding of the business and financial position they can help grow the business while keeping costs to a minimum.

 

Tips to choose the Best Bookkeeping Services for Small Businesses

1. Online or offline: You can choose a cloud-based software or an offline software depending upon your business requirements.
2. Data Security: This aspect is important if you choose virtual bookkeeping services for your small business.
3. Features provided by the software: You must check for the features that are relevant to you and your business.
4. User interface and complexity: You must choose a bookkeeping service that has a friendly user interface and is not too complex to use. Even if you have an accountant for the job, you should be able to browse and check things sometimes.
5. Scalability: The chosen small business bookkeeping company should be able to grow as your business grows. It would be very difficult to migrate from one accounting software to another.

 

Tips for Selecting Business Accounting Software

Make the decision with the help of your accountant

Your accountant may prefer that you choose an application that is compatible with the ones she uses. Every business is different; your accountant is in the best position to offer an educated opinion about which one is best choice for your particular enterprise. Your accountant may even be able to help you set up the software you choose.

Pay attention to add-on features

Add-ons bring extra functionality to a business accounting application. For example, they may allow you to access the software remotely, accept payments online, and integrate the accounting software with your ecommerce software. There are also add-ons that make accounting software compatible with tax software.

Keep your budget in mind

There is business accounting software available to suit all budgets. General applications for a broader user base may be downloaded free or bought off the shelf at a lower price.

Look at cloud applications

With cloud computing becoming a more prominent influence in modern business, it is important not to dismiss the many online accounting applications available.

Consider both your needs and your accounting skills

Your best bet for finding the right accounting software is to look at how your business operates, and then take careful stock of the different types of software on the market. If your business makes several million dollars a year, it will have very different accounting needs than one that makes less than $50,000. You have a variety of options when it comes accounting software products, including those designed specifically for small- and medium-sized businesses.

 

How to Choose the Right Bookkeeping Software for Your Startup

Consider your business requirements, and accounting skills

The business processes and how it operates, influence your choice of bookkeeping software. You must choose the software with features which complements the cash flow and business process of your company best. Your accounting skills is another factor that must be taken into consideration when you are choosing a software. Without the minimum layout of accounts, understanding the operation of the software and overseeing the reports can be difficult.

Know about the types of products available

There are different types of software for bookkeeping business available for small and medium-scale businesses. While some are free, others are paid packages available for small business accounting and payroll management, full-service business management, and online web-hosted software.

Consider your budget

As a small business owner, this is a primary concern for many who are looking for virtual bookkeeping services that are cost-effective. The price varies depending on several factors.

Consult your bookkeepers and accountants

Since the bookkeepers and the accountants will be using the software, consulting them beforehand is necessary to ensure it is compatible with their requirements. They have the necessary education for understanding the intricacies of the software and hence can help you regarding choosing the packages, customization, and add-ons that cover the financial requirements related to your business.

Compare and finalize your choices

Now that you have all the information you need regarding the top accounting and bookkeeping software, compare the pros and cons of each to shortlist which are the most suitable option for your business. You can even opt for the trial versions of different software.

 

Tips for Selecting A Qualified Bookkeeping Service

Look for someone with relevant experience

As a business owner, whether you have one employee or one hundred, you’re going to need someone with experience in the following areas.

Talk to government and local business associations

Small businesses are the lifeblood of our economy, both the state and federal government encourage their growth. Use government and local business associations like the Chamber of Commerce to help you find and decide on the right bookkeeping service for your business.

Tap into your network

When searching for an accounting pro who knows how to balance the books, the ideal solution might be closer than you think. Start by asking any friends & family members who own small businesses if they would recommend the bookkeeping services they use.

Reach out on social media

LinkedIn is a great place to start, it is widely considered the number one social media site for professional networking. You most likely have a profile on LinkedIn already, reach out to your connections and search for bookkeeping professionals that are recommended by your network.

Find a bookkeeper who is all about saving you money

Some bookkeeping services offer little more than simply reconciling your accounts and maintaining your payroll. But your business deserves better than that.