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What is the difference between tax preparation and tax planning?

Posted by Celene Robert

November 2, 2022

There is one thing that both entrepreneurs and business owners dread: taxes. Despite being set up for the greater good, taxes can feel like a burden for many business owners. 

A common misconception is that tax preparation is the same as tax planning. Although the two work in conjunction, they each serve a specific purpose for business owners.

To understand the difference between tax preparation and tax planning, you need to know the basics of the two terms, get familiar with related professional credentials and recognize which service is required based on business need.

What is tax preparation?

Tax preparation is the process of preparing and remitting annual tax returns to federal and state governments. This service is commonly done by a tax professional, such as an accounting firm or CPA. 

Tax preparation is an annual event with certain forms required based on your business type. Business owners will sign their returns and remit any amounts due. 

Tax preparation for business owners can become complex when it comes to maximizing deductions and credits — which is why many business owners turn to expert help. 

A professional accountant will take the financial documents you provide and enter the information into tax return software, ensuring accuracy and completeness in your return. This takes the burden off your plate and allows you peace of mind that the information being filed is correct. 

Accountants aren’t the only type of professionals that handle tax preparation. In fact, attorneys, enrolled agents and independent tax preparers can also file returns on your behalf. 

Regardless of who prepares your tax returns, you want to be sure you are hiring a qualified and trustworthy individual as your return contains sensitive business information. For further guidance, the IRS has published tips to help people choose a tax preparer.

Keep in mind that you the taxpayer are responsible for all information on your income tax return, and this is true no matter who prepares your return. 

What is tax planning?

The other service that involves taxation is tax planning. Tax planning is a year-round process that compiles actual business results along with projected information. 

The goal of tax planning is to reduce the business tax liability when returns are filed. Tax planning strategies generally need to be implemented before the end of the year to be effective. 

Like tax preparation, tax planning is commonly done by a professional because it requires extensive knowledge of the tax code. The strategies your professional uncovers will be tailored to your business’s situation. 

Talk to us about how Escalon’s FinOps services can provide expert tax preparation and planning for your business. 

Startups, for example, may not otherwise recognize that their operations could qualify them for the federal R&D tax credit.  A tax professional can check your eligibility for an array of other write-offs you might not know startups and SMBs can take.

For businesses with a large amount of taxable income, your accountant might recommend year-end tax planning strategies like purchasing more equipment to take special depreciation deductions. On the contrary, if you are generating a loss, you might be advised to refrain from making additional estimated tax payments.

Despite the growing list of benefits, many business owners and entrepreneurs do not take advantage of tax planning. Not only does it offer the opportunity to reduce your tax bill at the end of the year, but it can also position your business plan for growth. 

Small businesses and startups can see benefits with just one tax planning session before year’s end, while growing businesses might choose to enlist the assistance of an expert on a quarterly basis. 

What are required credentials for each service?

Whether you are looking for a tax preparer or a tax planning professional, you want to be sure the candidate has the necessary qualifications. To file returns with the IRS, preparers must have a preparer tax identification number, also known as a PTIN. 

There is no mandatory college education or professional license needed to prepare a tax return. However, professionals with credentials, such as a CPA license or four-year degree, may be able to offer you expanded filing options and provide additional services in conjunction with tax preparation, like reviews and audits.

When it comes to tax planning, candidates with more experience can provide you with strategic insight and actionable plans. There are no federal or state requirements for offering tax planning services. The burden of evaluating candidates falls on business owners.

Many business owners choose a professional based on the other services they offer. Having a professional to guide you with tax planning and tax preparation ensures a smooth process. 


Tax preparation and tax planning work in conjunction to ensure accurate filed returns and to minimize your business’s tax burden. In turn, this can put more money back into the business bank account providing scalability options without having to worry about funds to pay tax bills.

Want more? If you’re ready to optimize your business taxes, Escalon provides accounting and CFOs services, along with other back-office services that allow our clients to focus on growth. Talk to an expert today.


Celene Robert
Celene Robert

Celene heads up the marketing at Escalon. Passionate about helping companies grow their business, she spends her days finding new ways to bring essential business services to startups, SMBs, and growth-minded companies. Based in the PNW, she’s the proud owner of 8 pairs of Birkenstocks and a sassy, cuddly cat.

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