What is Effective Tax Planning?

1
What is Effective Tax Planning?

• Goal Maximize after-tax value
• How does this goal differ from tax minimization?
• Consider both tax and non-tax factors
• Consider alternative forms of business
  transactions and their tax effects, versus an
  after-the-fact tax compliance approach
• Strategic, active participation in the tax system
  versus a passive, uninformed role

2
Impact of Taxation on After-Tax Value

• Differences in tax treatment across different
  types of investment and financing decisions, and
  across different taxpayers, will influence both
• Before-tax return on investment
• Example Tax exempt municipal bonds typically
  pay lower before-tax rates of return than taxable
  corporate bonds
• After-tax return on investment
• Example Long-term capital gains of individual
  taxpayers are often taxed at lower tax rates than
  similar gains earned by corporate taxpayers

3
Effective Tax Planning

• 3 Key Considerations
• All parties Effective tax planning requires the
  planner to consider the tax implications of a
  proposed transaction to all parties to the
  transaction
• Example In negotiating an asset purchase, the
  buyer should also consider the tax implications
  of the transaction to the seller, as well as the
  manner in which the purchase will be financed
• All costs Effective tax planning requires the
  planner to recognize that taxes represent only
  one among many business costs. In the planning
  process all costs must be considered, including
  the costly restructuring of the business
  necessary to implement some tax plans
• Example Operating a business as a C corporation
  imposes double-taxation, yet provides substantial
  reduction in nontax costs via access to capital
  markets, liability protection,etc.

4
Effective Tax Planning continued

• All taxes Effective tax planning requires the
  planner, in making investment and financing
  decisions, to consider not only explicit taxes
  (tax dollars paid directly to tax authorities)
  but also implicit taxes (taxes paid in the form
  of lower before-tax rates of return on
  tax-favored investments)
• Total tax Explicit tax Implicit tax
• To receive tax favors, you typically either
• pay implicit taxes or
• pay more non-tax costs
• Either way, the before-tax rate of return is lower