What Is the Difference Between Tax Preparation and Tax Planning?

Taxes are a fact of life for every business. But if you run a startup or a growing small business, tax season can easily become one of the most confusing and stressful times of the year.

The good news is, it doesn’t have to be that way.

By understanding the difference between tax preparation and tax planning, as well as how to use both to your advantage, your business will be well-equipped to start making smarter tax decisions all year round.

Ready to make tax season less stressful? Let’s dive into it.

What Is Tax Preparation?

Tax preparation is the process of filing your federal, state and local taxes in compliance with all applicable laws and regulations. It involves gathering all necessary financial information, filling out all required forms and submitting them to the IRS and other tax authorities before the deadline.

It’s vital to do these tasks accurately and on time. Any mistakes in your tax preparation can lead to penalties, delays or even audits.

How Often Does Tax Preparation Occur?

For most businesses, tax preparation is completed once annually, typically during the first quarter. The specific deadline will vary based on your business’s structure. 

For businesses that operate on the calendar year, the deadlines are as follows:

• March 15th: S corporations, partnerships and LLCs
• April 15th: Sole proprietors, independent contractors and C corporations

If your business operates on a fiscal year instead, your taxes are due on the 15th day of the fourth month following the end of your fiscal year. For instance, if your fiscal year ends on October 1st, your taxes will be due on February 15th.

Most small business owners also need to make quarterly estimated tax payments throughout the year. Like annual tax returns, these are paid to the state and federal government. Missing these payments may result in penalties and a higher tax bill later on.

What Documents and Information Do I Need?

Tax preparation looks backwards at the year you just completed. You’ll typically need to gather:

• Income statements
• Expense records and receipts
• Payroll records
• Records of deductions and credits
• Tax returns and payments

While that may seem like a long list, accurate and organized bookkeeping throughout the year makes filing taxes run much smoother and saves you from scrambling for missing documents come tax season.

Who Handles Tax Preparation?

You can file your own returns as a business owner. However, the larger and more complex your business is, the higher the risk that you’ll miss key details, overlook deductions or even fail to file all the right forms.

That’s why many small business owners turn to professionals.

Tax preparers and certified public accountants (CPAs) have years of training and experience behind them and have worked with small businesses like yours before. They’ll know the forms you’ll need to fill out and how to do it accurately the first time.

Does My Business Need Professional Tax Preparation?

Every business must file taxes. The real question is whether you’ll do it all yourself or hire a professional to help you out.

Doing your taxes yourself may save you a bit of money up front. And if you’re a sole proprietor with a simple business structure, for example, it might not be too complicated to handle on your own.

However, the more complex your business is, the more challenging and time-consuming the process will be.

Working with an expert ensures that your taxes will be filled out correctly and on time every year. They may even be able to point out potential deductions that you might have otherwise missed, which could save you money in the long run.

What Is Tax Planning?

Tax planning is all about anticipating future tax needs. It’s the process of looking forward in time to minimize your future tax burden and align your tax decisions with your larger business goals.

Tax planning is a proactive process, asking you to take a strategic look at your taxes.

How Often Does Tax Planning Occur?

Unlike tax preparation, which is an annual occurrence, tax planning is an ongoing process. It should take place year-round, not just during tax season.

By planning ahead, you’ll be able to make smarter decisions regarding the timing of business transactions, operations and investments that affect your tax liability.

What Are Examples of Tax Planning Strategies?

Tax planning strategies are unique to each business, but here are just a few common ones:

• Deferring Revenue Recognition: If you’ve had a highly profitable year, you may consider deferring some revenue to next year or pre-paying for certain future expenses. While there are limitations, this can help your business balance its tax liability more evenly.
• Restructuring Your Business: S corps, LLCs, and sole proprietorships are all taxed differently. If you’re a growing startup, it may make sense to make the move from a sole proprietorship to an LLC to give you more legal protections and reduce taxes.
• Adding Employee Benefits: Offering benefits like 401(k)s doesn’t just attract talent. It can also help you save a little bit of money on taxes. Small businesses may be able to get a tax credit to offset the costs of starting a company retirement plan.
• Leveraging Tax Credits: Many startups and small businesses leave money on the table when they overlook opportunities like R&D tax credits. If your company is participating in qualifying innovation activities, you may be eligible for significant savings.

Who Handles Tax Planning?

Tax planning is usually carried out with the help of professional financial advisors, tax consultants or CFOs, whether in-house or outsourced. 

These experts understand the complexities of the tax code and your future business goals and can work with you to identify savings opportunities and routes of future growth.

Unlike tax preparation, tax planning focuses less on exact numbers and deadlines and more on building sustainable financial efficiency into your overall business strategy.

Does My Business Need Tax Planning?

Most businesses can benefit from tax planning, especially if they’re growing rapidly, planning to invest in equipment or R&D, or looking to reduce their tax burden.

Even small, strategic changes can create major long-term savings.

Whether you need help filing your next tax return or you want to align your tax strategy with your future goals, Finvisor can help. 

Get in touch today to see how our team of financial advisors and accounting experts can support your business.