Tax preparation and planning: Both necessary but different

For first-time startup founders, the distinction between tax preparation and planning can be confusing, but understanding it is the first step to minimizing your tax burden.  

Below, we’ll explore tax preparation vs tax planning, explain their relationship to 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 income tax obligation. 

A good tax preparer can sometimes find ways to help you reduce your tax bill. After all, they should know more about tax credits and tax deductions than the average person.

However, the primary purpose of tax preparation services is simply to complete and file each tax form for you to comply with state and federal laws correctly and in a timely manner.

Tax preparation occurs once a year, after the close of the tax year, and generally during tax season (between January and April, or September to October if an extension is filed). 

In most cases, individual and business tax preparation involves only one or two exchanges with your tax return preparers over the course of a few months leading up to the tax deadline.

Tax planning

Where the goal of tax preparation is to ensure you’re in compliance with state and Internal Revenue Service regulations, the purpose of tax planning services is to maximize your tax savings or tax refund.

In contrast to tax prep, tax planning is a year-round process that takes into account your tax filing history, tax record, current financial situation, retirement plan, and ongoing activities. 

In other words, in-depth and extensive communication between you and the tax expert is necessary to create personalized tax planning strategies that will actually minimize your tax liability.

This often involves an initial onboarding as well as regular meetings as tax law, tax breaks, and your business’s taxable income evolve. 

This kind of tax advice is a type of financial planning that can have tax implications far into the future, especially when it involves retirement planning and estate planning.

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, tax planner, or both, it’s important to understand the credentials and expertise necessary to offer each service.

Here’s an overview of the usual requirements to be both types of tax accountants.

Tax preparation service 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 individual 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.

However, 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 have certain credentials to represent you before the IRS.

For example, they must be an enrolled agent, Certified Public Accountant (CPA), or attorney to speak for you in audits, payment/collection issues, and appeals.

Tax planning service requirements

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

The effectiveness of a tax planner depends greatly on their knowledge of your industry, applicable tax laws, and your business’s specific tax situation.

Whether it’s an attorney, CPA, or an accredited tax advisor, finding the right tax 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 real-time finance dashboard, we provide accounting, bookkeeping, CFO, and, of course, tax services for a flat fee.

As part of your tax services engagement, we look through your past returns, historical tax data, and retirement plans to provide thoughtful, proactive tax planning as soon as you enroll. 

The goal of Zeni’s tax software and services isn’t just to keep clients in compliance but to create a financial plan that maximizes tax benefits using appropriate strategies. Just to name a few, that includes:

1. Entity structure optimization
2. Tax deduction maximization
3. Accounting method change
4. Section 179 benefits
5. R&D Tax credit
6. Foreign reporting and structure
7. Sales tax compliances

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

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

Additional Tax Prep & Planning Support

As your startup grows, keeping up with tax preparation goes beyond clean books and annual returns. From quarterly filings to compliance across multiple jurisdictions, the complexity can escalate quickly.

While Zeni manages your bookkeeping and overall tax strategy, many businesses complement it with platforms built to automate compliance.

Sphere

Sphere is an AI-powered global tax compliance platform designed to streamline multi-state tax filings plus international VAT and GST.

It centralizes obligations across sales and use tax, while automatically updating for state-specific regulatory changes.

Why pair with Zeni: Zeni keeps your books accurate and your tax plan optimized, while Sphere ensures you never miss a filing or compliance deadline.

Together, they provide startups with a streamlined, end-to-end approach to managing finances and filings.

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