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Tax Planning Strategies for Corporations-Part 1


The subject of corporate tax planning is often associated with a profitable year for a company. This is because there is no tax to pay in a loss year, but there is potentially a lot of tax to pay in a profitable year, and therefore the business is naturally interested in finding legal ways to minimize this tax burden. It is always best to conduct this sort of tax planning before the year has concluded, in order to allow time to implement strategies within the fiscal year while it is still in progress. There are many areas that can be addressed on this topic, so for the purpose of this article we will select a few of the more common items that often apply to the particular situation at hand.

When a company has had one or more loss years prior to the current profitable year, it can often carry forward some of the prior year losses and net them against the current year's profit and only pay tax on the net amount. This can only be done when the prior year's losses have not already been carried back or forward on a previous occasion. For example, suppose a company has had prior year losses of $100,000 and $80,000 and a current year profit of $200,000. Suppose also that $75,000 of the $100,000 loss has already been carried back and netted against a prior year profit, thus leaving $25,000 to be carried forward along with the $80,000 from the other prior year. This comes to a total of $105,000 of prior year losses that can be carried forward to apply against the current year profit of $200,000, leaving a net profit of $95,000 to be taxed instead of paying tax on the full original $200,000. This strategy is entirely optional, but often makes sense to use as long as it is possible to be done in the particular situation at hand.

A similar strategy applies to capital gains and losses, except that capital losses cannot be applied against regular profits; they can only be applied against capital gains. Therefore, it does not make sense to sell losing stock investments to realize a capital loss when the intention is to reduce the taxes in a profitable business year. However it would make sense to do this if the same profitable year included a capital gain on sale of a building, since in that case the loss on sale of stocks could be deducted from the capital gain in order to reduce current year taxes. Note that capital losses can always be carried back for three years or forward indefinitely, so that losing stocks which have no potential to create future investment returns can be sold even though the loss cannot be used in the current year for tax purposes, since it can be stored away for future use when capital gains may be expected to materialize.

Please contact Simkover and Associates at 905-943-4046 if you need further accounting services or advice in relation to this topic. Click here for additional contact information

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Tax Planning Strategies for Corporations-Part 1 | Simkover and Associates Chartered Accountants

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