Corporate tax planning notes for mba

Read below to understand the objectives and the further benefits of corporate tax planning.

Increase savings

Companies can easily reduce their taxes and boost savings with corporate tax planning. It helps use this income for company growth. This money is also useful for creating funds for emergencies. The businesses can retain these funds or also distribute them among the shareholders.

Economic Stability

Corporate taxes are essential for government revenue. Without this income, the government can face a major setback. The planning allows legal funds for the government every year. It promotes stability in the economy. Also, these taxes are necessary for infrastructure development.

Enhance Growth

The company's growth is dependent on money. The profits are used to promote products, bring efficiency to production, or adopt the latest tools. The company can also introduce new lines. Saving money with corporate tax planning helps fulfill this goal.

Minimization of litigation

Following legal measures of corporate tax planning helps lower income tax. It also avoids litigation from tax authorities. Following illegal measures can have the opposite effect and lead to fines for the business.

Productive investments

The company will make investments in exempt domains to save taxes. These investments are beneficial for the company in the long run. The funds can be used for emergencies or future goals.

Types of Corporates

The Indian taxation laws separate companies into two types. Domestic and foreign corporates have varying types of corporate tax planning. It is necessary to understand the differences in classifying companies for tax obligations.

Comparison

Domestic Company

Foreign Company

Economic transactions and activities of the company happen in India.

Economic transactions and activities of the company happen in multiple countries.

Registered with the Indian Companies Act

Domestic companies also include businesses with foreign registrations but operations and management in India.

Not registered with the Indian Companies Act

Types of Tax Planning

Tax planning is the process of organizing your financial affairs in a way that minimizes your tax liability within the bounds of the law. There are various types of tax planning strategies that individuals and businesses can employ to reduce their tax burden. Here are some common types of tax planning:

• Income Splitting: This strategy involves redistributing income among family members or legal entities to take advantage of lower tax brackets or exemptions. For example, a business owner might pay their spouse or children a salary or dividends from the business.
• Tax Credits: Tax credits are deductions from your tax liability rather than your taxable income. You can plan to take advantage of various tax credits available, such as the Child Tax Credit, Education Credits, and Renewable Energy Credits.
• Tax Deductions: Tax deductions reduce your taxable income, which in turn lowers your tax liability. Common deductions include mortgage interest, charitable contributions, and business expenses. Maximizing your eligible deductions can reduce your taxable income.
• Tax-Advantaged Accounts: Contributing to tax-advantaged accounts like 401(k)s, IRAs, Health Savings Accounts (HSAs), and 529 plans can reduce your taxable income and provide tax benefits. Contributions to these accounts are often tax-deductible or grow tax-free.
• Capital Gains and Losses Management: Timing the sale of investments like stocks and real estate can impact your capital gains tax liability. You can use strategies like tax-loss harvesting to offset gains with losses.
• Estate Tax Planning: This involves structuring your estate to minimize estate taxes upon your death. Strategies may include setting up trusts, making annual gifts within tax-free limits, and using the applicable exclusion amount.
• Business Tax Planning: Business owners can employ various strategies, such as choosing the right business structure (e.g., LLC, S-Corporation), depreciating assets, and taking advantage of tax deductions available to businesses.
• International Tax Planning: For individuals and businesses with international interests, strategies such as transfer pricing, foreign tax credits, and offshore tax shelters can be used to optimize global tax obligations.
• Tax-Efficient Investing: Choosing tax-efficient investments and holding them for the long term can reduce capital gains taxes. Index funds and tax-efficient funds can help minimize tax consequences.
• State and Local Tax Planning: Tax planning isn't limited to federal taxes; it also includes minimizing state and local taxes. Strategies may include relocating to a lower-tax jurisdiction or structuring investments to reduce state tax liability.
• Retirement Tax Planning: Planning for retirement includes strategies such as optimizing Social Security benefits, managing Required Minimum Distributions (RMDs), and planning for tax-efficient withdrawals from retirement accounts.
• Real Estate Tax Planning: Real estate investors can use strategies like 1031 exchanges to defer capital gains taxes, maximize deductions, and structure ownership in tax-efficient ways.
• Tax-Deferred Exchanges: In real estate and certain business transactions, tax-deferred exchanges (e.g., like-kind exchanges) allow you to defer capital gains taxes by reinvesting proceeds into similar assets.
• Charitable Giving: Donating to qualified charities can provide tax deductions. Advanced strategies, such as charitable remainder trusts and donor-advised funds, offer additional tax planning opportunities.
• Alternative Minimum Tax (AMT) Planning: High-income individuals may need to consider AMT planning to minimize the impact of this parallel tax system.

It's important to note that tax laws and regulations change over time, so it's crucial to consult with a tax professional or financial advisor to ensure that your tax planning strategies are up to date and compliant with current tax codes.

Tax Rebates

The companies can also avail of tax refunds under the Indian Income Tax Act. The tax rebates for companies are mentioned below.

• Deductions for new ventures or operations and exports are applicable under specific circumstances.
• Domestic companies receive dividends from other domestic companies. They can deduct this income in specific circumstances.
• New infrastructure and electricity source installations have specific deductions.
• Specific deductions are applicable for venture capital funds. These are also applied to venture capital enterprises.
• Business losses are allowed to carry forward for eight years maximum.Interest, dividends, and capital gains are also deductible in rare company situations.

These rebates help companies earn incomes without a tax obligation. It is helpful for businesses to reduce taxes with corporate tax planning legally.

Also read about Budgetary Control, here.

Benefits of Corporate Tax Planning

Concept and significance of corporate tax planning has several benefits discussed as follows.

• It helps save money in taxes. The business can use the extra income for growth and diversification.
• Corporate tax planning allows investment for long-term benefits for the company. These investments can be used as emergency funds.
• Corporate tax planning offers legal and white tax revenue to the government. It helps promote economic growth and stability.
• Companies don't have to face disputes with corporate tax planning. They can follow legal measures to reduce taxes.
• Businesses can estimate and plan earnings for the year. It helps in the preparation and correct financial estimations.

Limitations of Corporate Tax Planning

The following limitations of corporate tax planning must be kept in mind by business owners.

• Corporate tax planning can tie up company funds. The business must invest in tax-exempt sources to reduce taxes.
• Businesses may resort to tax evasion by confusing the exemption laws.
• Tax-exempted investments often have a lower interest rate income.

Conclusion

Companies must follow corporate tax planning rules for timely and legal tax savings. There are many advantages and disadvantages of corporate tax planning. It helps in regular evaluation and ensures the company has a higher income. This practice is applicable at the start of the year. The companies must follow the rules for tax-saving measures.

This strategic corporate tax planning pdf is necessary for the UGC NET exam. We hope you enjoyed learning about this corporate tax planning UGC net pdf. Find more sources related to this exam on Testbook. We will help make your preparation easy and fun.

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Corporate Tax Planning FAQs

What do you mean by corporate tax planning?

To define corporate tax planning is the measures and strategies followed by companies. It is to save taxes called corporate tax planning.

Why do companies have to invest in corporate tax planning?

Corporate tax planning allows legal ways to save tax. It helps increase the in-hand income with the company for growth and development.

What is a domestic company?

A domestic company is one registered under the Indian Companies Act. It has operations in India in a single currency.

What is a foreign company?

A company not registered under the Indian Companies Act is a foreign company. It has operations in multiple countries.

What is a limitation of corporate tax planning?

Corporate tax planning ties up company funds in investments. These funds can instead be used for company growth.