Tax Research Paper: Maxims of Tax Planning and Six Steps of Tax Research
I. Introduction
Business organizations use financial planning techniques to help make decisions that will maximize the net present value of the entity. An important component of the financial planning process is tax planning, which is the structuring of transactions with the intent reducing tax costs and gaining tax benefits. Strategic tax planning is a common occurrence in the business world because of its ability to help companies maximize their after-tax value.
Typically, firms use the services of outside specialists, also known as tax researchers, in tax planning. The role of the tax specialist is to determine the optimal business decisions that its client firm should make, as they relate to tax. When the tax consequences for a firm differ among decision alternatives, tax specialists help to identify the most optimal course of action for management to make in order to maximize their after-tax income.
Assuming the income potentials of all possible decisions are equal, a firm will focus on minimizing their overall tax expense. In order to exploit the differences in tax treatment among alternative transactions, a tax specialist must give careful consideration to the structure of the entity, the timing of the tax payments, the government bodies that have the jurisdiction to tax the transactions, and the categorization of the income or expense generate as a result of the nature of the transaction. These four variables are considered to be the most important guidelines used by companies when developing tax strategies.
II. The Four Maxims of Tax Planning
The first the major tax planning maxims, entity variable planning, says that a company should use its structure to its advantage. What this means is that when there are two related parties under common control and one is subject to a lower tax rate than the other, more income should be allocated to that entity, thus allowing for a reduction in the overall income tax expense incurred by the firm.
Business organizations use financial planning techniques to help make decisions that will maximize the net present value of the entity. An important component of the financial planning process is tax planning, which is the structuring of transactions with the intent reducing tax costs and gaining tax benefits. Strategic tax planning is a common occurrence in the business world because of its ability to help companies maximize their after-tax value.
Typically, firms use the services of outside specialists, also known as tax researchers, in tax planning. The role of the tax specialist is to determine the optimal business decisions that its client firm should make, as they relate to tax. When the tax consequences for a firm differ among decision alternatives, tax specialists help to identify the most optimal course of action for management to make in order to maximize their after-tax income.
Assuming the income potentials of all possible decisions are equal, a firm will focus on minimizing their overall tax expense. In order to exploit the differences in tax treatment among alternative transactions, a tax specialist must give careful consideration to the structure of the entity, the timing of the tax payments, the government bodies that have the jurisdiction to tax the transactions, and the categorization of the income or expense generate as a result of the nature of the transaction. These four variables are considered to be the most important guidelines used by companies when developing tax strategies.
II. The Four Maxims of Tax Planning
The first the major tax planning maxims, entity variable planning, says that a company should use its structure to its advantage. What this means is that when there are two related parties under common control and one is subject to a lower tax rate than the other, more income should be allocated to that entity, thus allowing for a reduction in the overall income tax expense incurred by the firm.
Cited: Jones, Salley M., and Shelley Rhoades-Catanach. Principles of Taxation: Advanced Strategies. 3/erd ed. McGraw-Hill Higher Education, 2004. "Tax Planning Fundamentals: Elements of Tax Planning." CCH Tax Research Network. 2005. CCH Internet Tax Research Network. Stephen M. Ross School of Business, University of Michigan, Ann Arbor. 11 Jan. 2006. Keyword: tax planning. Thomas, Donald B. United States. FASB. The 2005 FASB Report: An Overview of the Project on Uncertain Tax Positions. 30 Sept. 2005. 11 Jan. 2006 .