Got the Tax Blues? is Your Business Structured With Tax Breaks in Mind?

Are you suffering from post-tax syndrome? Feeling exhausted after rushing to the accountant's office and completing your return just in time? Did you check and re-check your tax returns to see if you really have to pay that much to the IRS? Run to the banks to deposit sufficient money in your account to cover those check amounts to the IRS? Stood in long lines at the post office yesterday? April 15th - tax deadline day when most Americans line up at neighborhood post offices with their tax returns and certified mail with return receipts filled out (just to make sure the IRS knows they mailed it in time) - is now past us, for another year.

It was a similar experience for me this year and probably the most hectic compared to past years. If you are like me, self employed and running your own business, then you know what I am talking about. We wait till April 15th to pay our self-employment tax and most likely file extensions so that we can complete our business books, review with our accountants, and file tax returns at a later date. A topic that has been on my mind lately is whether I have selected the most appropriate business entities, such as Limited Liability Company (LLC), Limited Liability Partnerships (LLP), Sole Proprietor, Partnerships, C corporation, or S corporation, for my businesses and investments to optimize the tax breaks that are out there. As they say, the rich get richer because they know how to make their money work for them. They also know what legal tax breaks and strategies to use to pay the lowest amount of tax. The poor and middle or employed class pays the highest tax rate in America due to their ignorance of tax strategies and the inability to incorporate their work and run it like a business.

Deciding to incorporate and selecting which business entity fits best for your business needs can be a daunting task. However, spend the time to research and understand the implications of each entity and what it means to your business. Further below in this post, some basic questions are posed for you to consider and some additional information on some of the more commonly used business entities. These questions and basic information will guide you along the path to figuring out the best tax strategies for your business. Additionally below are some recommended books from Amazon.com that have a wealth of valuable information on tax planning.

Here are some questions to guide you along the path of tax planning and tax strategies whether you are a home business owner, self employed or run a larger corporation:

Are you a sole owner or do you have partners?
Do you distribute and sell shares for your business?
What is the nature of your business and what state do you operate in?
Do you drive your own vehicle for business or do you have a company vehicle?
What business expenses can be deducted?
Do you work at home and have a home office?
How are business meals and entertainment of clients handled within each entity?
What percentage of your health insurance costs are tax deductible?
Do you have annual meetings and minutes with partners and shareholders?
Are there passive and active members in the business?
Does your business provide benefits to employees?
Do you have a pension plan and long term care?
Does your business purchase new equipment each year?
Does your business raise capital from outside funding?

Those are just some basic questions to start with, which may determine or limit the choices you have in regards to what entity works best for you. It will also help you understand what tax breaks can be employed and what strategies give you the most bang for your buck!

For self employed individuals, like consultants and contractors, choosing a business structure is more straightforward with IRS rules for personal income and small business tax breaks. The tax breaks may not be significantly different whether you are a sole proprietor, partnership, or LLC. However, business liability (a topic for another post) is very different even within those 3 choices and how you protect your assets.

A business owner has a slightly more complex task when it comes to incorporating their business. C corporations are dropping in popularity but are still the right choice for large corporations (think really big companies). As a C corp., taxes on profits are paid by the corporations at a much higher corporate tax rate and business expenses are handled by the corporation itself. Owners are only taxed on the salaries, bonuses, and draws from the corporation. Beware, this means double-taxation. However, there are other benefits and advantages to having a C corp. if you are a large corporation.

S Corporations are the common choice for most small and medium sized business. After small business expenses are deducted, profits are shared or distributed to the owners and owners are taxed at the individual rate, which is much lower than the corporate tax rate. However, S corporations are limited in how they can own and sell shares of the company, engage in private equity financing, and other infusions of capital into the company.

The bottom line is that selecting the right business entity is important and can result in many tax breaks, but paying the least amount of tax is not the only concern. It's important to consider other aspects as well such as business liability, financing needs, and future growth considerations.

Consult with your tax accountant and business attorney (beware, they both might have different opinions), and then look at the overall benefits and drawbacks to the recommended options.

Hope this is helpful to the community. If there is any interest in getting into the details of any of these entities, let me know, we can share that in a future post. Share with us what business entities you choose for your business and why?

Now, remember to get back to completing your business tax review and tax return before the next deadline.

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