What is Tax Planning and How to Do It? 5 Steps!

Knowing what tax planning is is a legal way to reduce a company’s tax expenses. This is possible because this practice helps identify ways to reduce the tax burden without violating legal rules and regulations.

Also called tax avoidance, this activity generates savings for the business, as well as avoiding the payment of undue taxes and helping to keep the company in compliance, protecting it from various problems with regulatory bodies.

Considering that this charge burdens businesses and reduces profit margins, it is so important to know what tax planning is and how to do it right, don’t you think?

This is exactly what we will be talking about in this article. So, let’s keep reading to find out all the details right now.

What is Tax Planning?

Tax planning, or tax avoidance, is that accounting practice intended for reducing those costs generated by a company as a consequence of paying taxes. To this end, a lot of strategies are adopted, among which is data collection, study of tax laws and rules, among other related strategies.

Carrying out good planning for paying taxes is a way to legally reduce this expense, as well as to improve the company’s financial management and avoid being subject to fines and other penalties that may be applied by regulatory bodies.

As a result, it is possible to legally reduce fiscal and tax expenses , a condition that helps to increase the profit margin; and keep the business in compliance with current legislation, improving the brand’s image in the market.

What is Preventive Tax Planning?

Preventive tax planning is the type of planning carried out to prevent financial losses resulting from the payment of taxes. This process involves the punctual monitoring of taxes that need to be paid by the company, in order to confirm whether they are aligned with the economic activity carried out.

In other words, this type of planning aims to anticipate possible errors that may be made in terms of financial management and the correct and timely payment of taxes.

Throughout their existence, companies can change their tax regime as a strategy to reduce tax expenditure, as long as this change is duly aligned with the economic activities carried out and the revenue generated.

This is because each of these regimes covers different classes of economic activities, as well as having specific profitability limits and tax rates.

In this way, preventive tax planning helps to keep the tax regime up to date. This, in turn, prevents financial losses in the months following the change in activity, as well as future problems with regulatory entities, such as the Federal Revenue Service, due to outdated business records.

How Important is Tax Planning?

Now that it is clearer what tax planning is, it is also important for you to know why this practice has become so important for companies. To explain this, we will list below the main advantages that this practice can generate.

Thus, tax planning is important because it helps your agricultural business to:

• not paying undue taxes, such as those that do not apply to the economic activity carried out;
• reduce costs generated by mandatory taxes;
• avoid possible fines and charges from the tax authorities;
• identify new possible payment terms, contributing to improving financial management and cash flow;
• ensure compliance with current laws and regulations.

How to Do Tax Planning?

Understanding what tax planning is will only be complete if you know how to carry out this practice, do you agree?

In this regard, it is essential that you keep in mind that this activity goes beyond simply correctly calculating taxes. Since it requires a precise study of tax laws, it is ideal to have the support and guidance of accounting professionals specialized in tax avoidance .

However, we will help you better understand what tax planning is by presenting the step-by-step process that is commonly used in this strategy, which are:

1. collect key data about your business;
2. analyze the legal nature in which the company is classified;
3. review the choice of tax regime;
4. start preparing the tax plan;
5. review the planning periodically.

1. Collect Key Data About Your Business

The data we refer to in this first step refers to information such as the company’s structure and size and the economic activities carried out. The objective is to identify everything that has a direct impact on the taxes that need to be paid, in order to verify what can be changed without breaking the law.

2. Analyze The Legal Nature of The Company

Legal nature is the legal regime to which a business is subject. This concept includes the requirements and standards that must be complied with by the partners.

Among the existing legal natures are Public Limited Companies, Limited Companies (LTDA), Small Businesses (EPP), among others.

The tax regime is established based on the definition of the legal regime. For this reason, this information is important for this type of planning.

3. Review Your Choice of Tax Regime

And speaking of tax regimes (which are the ones we have already presented in this article), it is essential to adhere to this choice and update it whenever necessary. The reason is that this is the guideline that determines how much tax the business needs to pay, what the rates are, and how and when the collection needs to be made.

4. Start Preparing The Tax Plan

With all the previous points duly raised, it is possible to move on to preparing the tax plan itself.

To do this, an analysis of different economic scenarios must also be carried out, based on the verification of points such as:

• annual revenue of the company;
• billing predictability;
• costs with fixed and variable expenses;
• short, medium and long-term financial objectives and goals;
• investments and desired profit margin;
• among other similar points.

By putting all these insights on paper, it becomes easier to identify what can be improved and, therefore, how to legally reduce tax costs.

5. Review The Planning Periodically

Ideally, it is important to review your financial planning from time to time to identify new opportunities for tax reduction. This review can be done whenever the business’s revenue changes significantly, either upwards or downwards, or when there are changes in the economic activities carried out.