‘ tax planning strategy’ is a term used in accounting to describe the activity of keeping track of items used and expenses that run throughout the year. In an organization, the financial statements are used to carry out the tax planning whereby the three major deductions are made; these are the state taxes, the mortgage and the charity gifts. The use of the term ‘tax planning strategy’ in SFAS.NO,109, is totally different from the above traditional definition. SFAS .NO, 109, uses the term as an act of implementing the understanding of tax advantage regarding tax credit or loss that has been carried forward before it can no longer be termed as a credit. Tax planning strategies are considered in no.109 when offsetting sources and carrybacks are not enough. According to SFAS.NO,109, the definition of tax planning strategy is the prudent and feasible act that is carried out by management with the aim of preventing carry forward from affecting the whole tax process. To accomplish the tax planning process, the management should be able to have the knowledge of the timing and pattern on how to reverse the temporary changes that exist (Klassen, Lisowsky & Mescall, 2016).
Tax planning strategy, in this case, is an act that is characterized by critical decision and cautious reasoning. This is because it is a step that is considered by the management as critical but most appropriate in salvaging the financial situation in a company.It is an action that management takes it with caution because a single mistake in making the decision will result in a total mess to the whole process.An auditor has to be knowledgeable about the operations and the entity of the business before taking a step through tax planning strategy. It is, therefore, the responsibility of the auditor to determine whether the tax planning strategies would be implemented or not.
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Tax planning strategy might have adverse consequences if not applied decisively; it takes the effort of an expert in auditing to determine when to apply the tax planning strategies in a company. The strategy is termed as a prudent act in preventing the carry forward loss from expiring before it is used. However, a strategy will not be termed prudent if it will jeopardize the existence of a company. Therefore the SFAS.NO,109 act was implemented by accounting board to take care of such case that requires the use of tax planning strategy (Gupta, Mills & Towery 2014).
The feasibility of a tax planning strategy is also another step to be considered by a company; the auditor should ensure that the strategy is feasible in the sense that it must be within the control of the management. To determine the feasibility, the tax planning strategy should be evaluated. Firstly it should be determined whether the strategy is capable of producing enough taxable income. Secondly, the auditor should conduct an analysis of the financial status of the company so as to determine the carry forward expenses; this will help in evaluating the feasibility of the strategy.
Tax planning strategy has two characteristics, these are the feasibility and prudence, in every company, a tax planning strategy is an act applied with the aim of salvaging the company from running at a loss as a result of not using the carry forward expenses. The two characteristics represent the caution to be taken by any company before considering implementing the strategy. If the strategies are no appropriate, the company could end up running at a more loss. Therefore it requires the knowledge of an auditor to provide advisory opinions before a company implements them. For the strategy to be successful, timing is of great essence, the reason as to why an auditor is needed in the whole strategy planning (Klassen, Lisowsky & Mescall 2016).
Reference
Gupta, S., Mills, L. F., & Towery, E. M. (2014). The effect of mandatory financial statement disclosures of tax uncertainty on tax reporting and collections: The case of FIN 48 and multistate tax avoidance. The Journal of the American Taxation Association , 36 (2), 203-229.
Klassen, K. J., Lisowsky, P., & Mescall, D. (2016). Transfer Pricing: Strategies, practices, and tax minimization. Contemporary Accounting Research .
Klassen, K. J., Lisowsky, P., & Mescall, D. (2016). Transfer pricing: Strategies, practices, and tax minimization. Contemporary Accounting Research .
