Tax Planning

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A tax planning opportunity is an action an entity must take to create or increase taxable income in a period before the expiration of a tax loss or tax credit carryforward. Examples of tax planning are:

Asset swap. Selling an asset that generates non-taxable income and using the funds to buy another asset that generates taxable income.
Asset sale. Selling an asset that has appreciated, and for which the tax base has not been adjusted to reflect the appreciation. A variation on this approach is the sale and leaseback transaction.
Deduction deferral. Delay the recognition of some deductions from taxable profit that can be deferred.
Recognition basis. Elect to recognize interest income for the calculation of taxable profit on either a received or receivable basis.

Tax planning may shift an entity’s estimated future taxable income between future years, or it may shift the estimated timing of future reversals of temporary differences.

For example, Franciscan Friars’ Discrete Tanning has a $50,000 operating loss carryforward that will expire unused at the end of the following year. To make use of the carryforward, it implements a tax planning strategy to sell the installment sales receivables on its tanning bed products in the following year, thereby accelerating the future reversal of taxable temporary differences to generate gains on the installment sales. The company can then offset the operating loss carryforward against these gains to reduce its taxable income.