Definition of Corporate Tax Planning

The term "corporate tax planning" encompasses the strategic structuring of business operations in order to minimize tax liabilities. Corporate tax planning activities generally seek to avoid legally triggering tax costs rather than illegally evading an existing obligation to pay taxes. Tax planning represents a forward-looking activity, as opposed to tax compliance or reporting, which reflects back on events that have already taken place. Corporations typically engage certified public accountants or tax attorneys for technical advice in this complicated area.

Tax planners understand that treatment varies depending on the type of corporate entity doing business. In the United States, regular corporate entities must pay federal income tax on annual earnings, and upon the subsequent distribution of these earnings, individual shareholders receiving dividends must pay tax as well. Some corporations (usually those that do not offer shares on a public exchange) may seek to avoid duplicate levels of taxation by organizing as S corporations or limited liability companies. The Internal Revenue Service treats these special corporations similar to partnerships (IRC Sections 701-777) in that taxation of annual earnings applies only at the shareholder, and not the entity, level.

A fundamental aspect of corporate tax planning involves determining which particular countries, states and cities have the authority to impose tax on corporate activities. Each sovereign government maintains different rules for imposing tax, which means that jurisdictional arbitrage can create tax cost differentials. For instance, a corporation may decide to establish operations in Nevada or Switzerland instead of California or Germany, respectively, due to likely income tax savings. Conversely, ongoing business developments, such as earning revenue from a new customer located on the wrong side of a jurisdictional border, could trigger additional corporate tax liabilities.

Corporate tax planning opportunities oftentimes arise from identifying the appropriate time to recognize an item of income or expense. Deferral of income recognition to a future period or acceleration of expense deductions to a current period results in positive cash flows and savings due to the time value of money. Strategically exploiting the discrepancies in rules for book accounting versus tax accounting may help create timing differences that produce tax benefits. Examples of timing differences utilized by tax planners for U.S. corporations include deferral of taxation on income earned by foreign subsidiaries and accelerated depreciation deductions on qualified fixed assets (IRC Section 168).

Tax attributes represent favorable characteristics of a corporation's tax posture that planners may draw upon to offset tax liabilities. U.S. corporate federal income tax attributes include net operating losses, research and development credits and foreign tax credits. The IRS allows corporations to assert a claim for these attributes in the current year and carry them forward to future years in order to maximize the benefit. Planning around attributes typically concerns either generating additional claims (for instance, through analyzing which activities meet the definition of research and development (IRC Section 41) or identifying when to utilize specific types and amounts of attributes.