Tax Preparation and Planning: Both Necessary But Different

When most people think about saving on their annual tax bill, the first thing that comes to mind is hiring a professional tax accountant for tax return preparation and tax advice. However, even if your tax preparer takes advantage of every possible opportunity to save you and your business money when it’s time to fill out the necessary tax forms, you’re likely missing out on substantial savings that can come from professional tax planning services.

For first-time startup founders, the difference between tax preparation and planning can be a bit confusing, but understanding the distinction between the two concepts—and the fact that they are two separate services—is the first step to lowering this year’s tax liability, and minimizing your startup’s tax burden for the years to come.  

Tax preparation and tax planning are important to consider as part of your startup’s financial planning process. Below, we’ll explain the difference between tax preparation vs tax planning, explore their relationship to one another and your business, and talk briefly about the requirements necessary to perform each service.  

Tax Preparation And Tax Planning: What They Are And When They Happen

The primary differences between tax preparation and planning have to do with (1) the purpose of the services and (2) when they’re performed. 

Tax Preparation

As we mentioned above, many taxpayers think of a tax preparer as someone responsible for minimizing their annual tax bill. Though a good tax preparer can sometimes find ways to help you save (they should know more about tax credits and tax deductions applicable to your business than the average person), the primary purpose of tax preparation services is simply to complete and file the necessary forms for you during tax season to comply with state and federal laws correctly and in a timely manner.

Tax preparation occurs once a year, after the close of the financial year, and generally during tax season (between January - April, or September - October if extension is filed). For most businesses and individuals, tax preparation involves only one or two exchanges with their tax return preparers over the course of a few months leading up to the tax deadline. 

Tax Planning

Whereas the main goal of tax preparation is to ensure you’re operating in compliance with federal and state tax laws, the purpose of tax planning is actually to maximize tax savings (including minimizing penalties) for the tax planner’s clients. 

In contrast to tax preparation, tax planning is a year-round process that takes into account the client’s past tax filings, current financial situation and regulations, and future financial goals, and their year-round activity. Successful tax planning strategies therefore require ongoing communication between a business or individual and their tax planner. This often involves an initial onboarding meeting, as well as regular communication between the tax planner and client, as both the applicable tax laws and the business’s situation evolve.  Tax planning is a more long term process and sets plans for immediate as well as long term benefits for the clients.

See also: A Complete Guide to Filing Small Business Tax Returns 

Required Credentials For Tax Preparers Vs. Tax Planners

Whether you’re considering hiring a tax preparer, a tax planner, or both, it’s important to understand the required credentials for each job, as well as some factors that—though they aren’t required—you may want to look for when seeking tax preparation or planning services.

Tax Preparation Requirements

The absolute minimum requirement necessary to prepare taxes is a preparer tax identification number (PTIN), which allows a professional tax preparer to prepare federal tax returns for compensation. A PTIN, however, requires no other professional credentials and no accounting or tax preparation experience. Additionally, seven states—California, Connecticut, Illinois, Maryland, Nevada, New York, and Oregon—require a separate credential to prepare taxes within their borders, but these are generally similar to the PTIN and are not indicative of experience and knowledge.

While anyone with a PTIN and the necessary state-level credential can file your annual tax returns, a preparer must be an enrolled agent, a Certified Public Accountant (CPA), or an attorney to represent clients before the IRS on any matters, including audits, payment/collection issues, and appeals. 

Tax Planning Requirements

While strategic tax planning requires significantly greater expertise and specific knowledge than tax preparation alone, there are no federally or state-mandated requirements for tax planners. 

Because the effectiveness of a tax planner depends greatly on their knowledge of your industry, applicable tax laws, and your business’s specific situation—whether it’s an attorney, CPA, or in especially sophisticated cases, an accredited tax advisor—finding the right tax planning professional is a complex matter best discussed with investors, shareholders, and decision-makers within your company.

Need help with tax preparation and planning for your startup?

Zeni is the first AI-powered finance concierge specifically for startups. In addition to our cutting-edge real-time finance dashboard, we provide clients with high-quality accounting, bookkeeping, CFO, and, of course, tax services for a flat fee thoughtfully designed based on the client’s financial growth, thanks to our team of experienced finance and accounting professionals.

As part of your tax services engagement with Zeni, we look through our customer’s past returns, historical tax data and future goals with a mind of providing thoughtful, proactive tax planning as soon as they enroll in Zeni’s Tax Services.  The goal of Zeni’s tax services is not to just keep clients in compliance but provide maximum tax benefits using tax laws, and applying the most suitable tax strategy for the clients.  Just to name a few:

1. Entity Structure
2. Accounting method change
3. Section 179 benefits
4. R&D Tax credits
5. Foreign reporting and structure
6. Sales tax compliances

All Zeni Tax customers get access to our team of startup tax professionals to help manage ongoing tax and tax compliance needs, and answer any questions you may have throughout the year (not just at tax time or year-end).

To see how Zeni can improve your tax planning and preparation experience, click here to book a live demo.