Tax preparation is the ultimate “of course” service for growth-stage business owners. Tax planning is entirely different in terms of process and value. But it’s easy to conflate the two, especially for people who are busy running a business. So what are we really talking about with tax preparation vs. tax planning? It’s about dealing with the present vs. planning for the future. The good news is you can do both.
In this article, I’ll explain the differences (part 1) and discuss specific tax planning benefits (part 2).
Part 1 – Breaking Down The Difference By Definition & Value
Here’s the difference by definition
Tax preparation, noun. The collection, organization, preparation, and submission of tax documents to send to the Internal Revenue Service (IRS) in the form of a tax return.
Tax planning, noun. An ongoing process of research, analysis, and strategic planning for tax reduction purposes.
Here’s the difference by value
We have our definitions, so let’s talk about value.
Tax preparation is the act of transferring money to the Internal Revenue Service (IRS) in the correct way so that you don’t increase your chances of getting audited or catching a fine.
It keeps businesses on the right side of the law.
Tax planning is the process of saving money on taxes through strategic financial and business decisions.
It positions businesses for long-term tax reduction and asset protection with tax strategies that scale.
Tax preparation is a repeatable act
Tax preparation is straightforward action that involves:
- Collecting financial statements and related documents, such as invoices, receipts, and statements from banks and insurers.
- Inputting relevant financial information into the correct IRS forms
- Submitting forms and documents to the IRS
If your business settles for tax preparation alone, you’re just paying someone to pay the IRS so that you don’t get audited or catch a fine.
Tax planning is a continuous process
As Anil Grandhi at Forbes puts it, “Proactivity is not an option—it’s a necessity.” ²
Proactive business tax planning involves a full-spectrum view of your business’ finances and operations for sustained tax reduction. Strategies take into account the following:
- Income
- Expenses
- Investments
- Tax Deductions
- Tax Credits
- Entity Structure
- Accounting Practices
- Personal Finances
- Retirement
Now take all of those disparate elements and create a detailed plan that reduces the cost of doing business from inception to sale. It’s worth it.
Part 2 – Making the Case for Tax Planning
Straight away: tax preparers do not have the same level of education and qualification as a CPA. The only requirement for a tax preparer is that they have a Preparer Tax Identification Number (PTIN).³ People with this credential are not considered tax experts.
Know the four reasons why small businesses need tax planning
According to the IRS, small businesses that engage in tax planning are more likely to be profitable.⁴
Of course, when we talk about profitability, we also talk about compliance—filing returns on time in the correct manner. So the tax preparation vs. tax planning question is not some sort of prize match. It’s about the transition from start-up to growth stage, from youth to maturity. But the two are not “equal.”
If you’re tax planning, you’re definitely filing taxes, right? But if you’re filing taxes, you’re not (necessarily) tax planning. Fortunately, any CPA who can provide the benefits listed below can also file taxes on
#1 Tax planning never stops looking for ways to lower your bill
Proper tax planning is a year-round endeavor. But monthly or quarterly check-ins are worth it. Accountants analyze your past tax returns and statements to identify actions that save money on next year’s return.
#2 Tax planning saves time for business owners
Tax planning can save small businesses valuable time by helping them prepare for tax season. By setting up a plan, you can ensure they withhold the correct amount of taxes throughout the year, preventing a last-minute scramble to make up for shortfalls.
Solid strategies also reduce the need for extensive record-keeping and documentation during tax season. It allows small businesses to stay ahead of their tax obligations and avoid the stressful process of rushing to meet deadlines.
#3 Tax planning gives you a better understanding of your business
Updated records matter. They show you exactly how your business’s money is coming and going. This knowledge allows you to make real-time decisions based on current data.
You will be better positioned to anticipate risks and better prepared for frivolous audits.
#4 Tax planning grows your business
By planning year-round, you can set up your business to take advantage of powerful tax credits. Tax credits give you money to invest in assets like:
- Real Estate
- Electric Vehicles
- Retirement and Healthcare Accounts for Employees
Remember, tax credits are a dollar-for-dollar reduction of your tax liability, so they’re always worth it.
Ready to make the jump? Let’s meet.
I write articles to keep business owners like you informed and primed to make the right decision when the moment comes. If that moment is now, give me a call.
Talk soon,
Jeremy A. Johnson, CPA
References
- How Much Do Small Businesses Pay in Taxes? [Internet]. Nationwide. 2023. https://www.nationwide.com/business/solutions-center/finances/how-much-small-businesses-pay-taxes
- Grandhi, A. Tax Planning: An Essential Tool for Business Owners. How Much Do Small Businesses Pay in Taxes? [Internet]. Forbes. 2021 https://www.forbes.com/sites/forbesfinancecouncil/2021/08/19/tax-planning-an-essential-tool-for-business-owners/?sh=4c8d25453b85
- PTIN Checklist: What You Need to Get Started. [Internet]. Irs.gov. Available from: https://www.irs.gov/tax-professionals/ptin-application-checklist-what-you-need-to-get-started
- DeLuca D, Greenland A, Hennessy S, Kindlon A, and Stavrianos M, IBM Consulting. The Tax Compliance Burden of Small Businesses—A Profile of 50 Businesses [Internet]. Irs.gov. 2004. Available from: https://www.irs.gov/pub/irs-soi/04deluca.pdf