Taxes & Business Strategy
This paper will take an in-depth look at how businesses develop their strategies relative to taxation. Specifically, the essay will look at several key areas of business activity, how companies' liability is impacted as a result of such activity, and how they may plan their respective tax returns in a way that serves the best interests of the business by incurring the least impact on profit. Discussion of internal operations tax strategies and more complex tax situations is presented.
Keywords: Apportionment; Electronic Federal Tax Payment System (EFTPS); Multinational Corporation; Payroll Tax Fund; Tax Liability; Writeoff
There are few elements of life in modern industrial society more popularly unpopular than taxation. Governments impose taxes on income, property, retail sales, restaurant patronage and commerce. In the United States, one of the targets of most citizens' vitriol is the agency responsible for collecting taxes — the Internal Revenue Service (IRS). Taxes are typically levied on the basis of commercial transactions — an individual receives compensation for working at a factory, while the owner is taxed because his or her factory generates profits. Out of this application of taxes to nearly every aspect of life, an unknown author once quipped, "A fine is a tax for doing something wrong … a tax is a fine for doing something right" (www.QuoteGarden.com).
Still, although they do so begrudgingly, most taxpayers acknowledge the fact that taxes are used to fund government programs and projects at the federal, state and local levels. From police, schools and roadway repair to national security, international trade and support of the elderly, taxes play an integral role in society. As such, taxes are largely viewed as a necessary evil.
This reluctant acceptance of taxes does not mean, however, that individuals and businesses alike will not seek to minimize their tax liability. The effort to find ways to avoid paying excessive taxes is at the core of tax planning. Individual taxpayers, for example, will ideally look at ways to modify their adjusted gross income, one of the main areas targeted by taxation agencies, so that as much of their financial assets as possible are fragmented into non-taxable funds (such as retirement accounts and 401(k) programs) or offset by tax credits.
Businesses must also seek to reduce their tax liability "footprints," taking into account their employee expenses, new tax laws and regulations and any existing tax credits and exemptions for which they may be eligible. This paper will take an in-depth look at how businesses develop their own strategies relative to taxation. Specifically, the essay will look at several key areas of business activity, how companies' liability is impacted as a result of such activity, and how they plan their respective tax returns in a way that serves the best interests of the business.
Doing Business in the 21st Century Economy
The fundamentals of conducting business in the 21st century are in many ways not dissimilar from those of commercial enterprises of the latter 20th century and earlier eras. Business exists to meet the demands of the customer. In order to sell its product or service to the consumer, the company will market it, helping spread the word about the value of the product, tapping into and taking advantage of various networking opportunities in order to present the product to as many consumers as possible. As demand for the company's goods increases, the company hires additional personnel to conduct internal operations (such as human resources and accounting), public relations, sales and marketing.
Of course, the landscapes involved with commerce have changed considerably. In the late 1980s, for example, the American financial system was in relative disrepair while the rest of the economy was experiencing sluggish growth. Meanwhile, Japan's technological industries gave that country's economy an extraordinary boost. By the late 1990s, the United States economy, revived by the explosion of information technology and financial services, re-captured the lead from Japan in terms of prominence in the international economy ("The 21st Century," 1998). In fact, the development of a new international economy in only the last few decades represents a major evolution in the way business is now conducted, attributed in no small part to the development of new information technologies and Internet commerce.
The economy of the 21st century is global. Many transactions are conducted via the Internet, which means that companies that seek to be competitive in this marketplace must expand and diversify their operations to account for increased business opportunities. Large and small businesses alike may act similarly in this regard — they may expand their staffs, develop web-based commercial platforms and link with other companies to fortify their positioning in the market.
Because of this evolution, businesses must also adjust their tax planning endeavors in order to account for recently imposed and/or heretofore irrelevant tax laws and regulations. There are many examples of taxation issues facing businesses in this new environment.
When developing a tax strategy, a business, like any other taxpayer, will seek to minimize its taxable income. This pursuit does not literally mean cutting staff and other assets — rather, it means that by taking a full account of all expenses and taking advantage of all tax exemptions and credits, a company may see a reduction in its tax liability.
Reducing Tax Liability
There are a number of steps businesses may take toward this end. In one area, internal operations, the company seeks to reduce its liability by increasing expenses. Businesses all require office supplies and office machines (such as copy paper and computers). These items qualify as business expenses, which may be used to offset tax liability. In other words, businesses often seek to purchase equipment as well as basic office supplies in large quantities. The rationale is simple — if a company purchases all of the items it needs in a given tax year, then that company will also see a reduction in the amount of taxes it owes. Similarly, tax advisers recommend that businesses that are nearing the end of the year should make sure that all of their bills for that year are paid before December 31 — any bills paid in the next year are applied to the following year's tax bill.
In addition, it is important for businesses to take account of any expenses or investments that for whatever reason fail to bring a return. Companies may purchase shares of another company, or purchase computer systems or otherwise acquire systems and products that are designed to benefit the business's operations. If the investment fails to generate that return, its purchase may be considered a "writeoff" — listed on a tax return as a deduction from the company's overall tax liability. While companies seek to avoid such types of purchases and investments, they may offset the losses via tax reporting. Careful monitoring of writeoffs may help a company recoup losses caused by that expense and at the same reduce the company's overall tax bill.
(The entire section is 3229 words.)