Tax Tips

The major objective for most people in business is to maximize the return from the business venture. Cutting your taxes will help you achieve that goal.

Review these tax tips; then contact us for assistance in identifying and implementing the best strategies for you.

  1. Give careful consideration to the legal form of doing business. The tax and nontax consequences of the form in which you do business are significant. You may choose to operate as a sole proprietor, a partnership, or a corporation.
  2. Consider "Section 1244" stock for a new business. If you're starting a business and choose to operate as a corporation, investigate the advantages of Section 1244 stock.

    There are requirement that must be met, but if you stock qualifies and your business later fails, you can deduct annually up to $100,000 of the loss against ordinary income ($50,00 on a single return).
  3. If you operate in corporate form, keep accurate and thorough minutes for the corporation .The small effort this requires will pay off handsomely if the IRS audits you. Minutes should document transfer of funds or assets into or out of the corporation, officers' salaries, shareholder dividends, officer and employee benefits, and related-party transactions that might be scrutinized by the IRS.
  4. Elect S corporation status. If your sole proprietorship or partner ship is producing a net profit in excess of a reasonable compensation for you time, you could save money by incorporating and electing S status.

    You're required to take a reasonable wage for the work you do but no more than that. If reasonable compensation for what you do would be #20,000 for example, there is little point in paying social security tax on more.

    If you incorporate and elect S status, the salary you take will be subject to payroll taxes, but the profits above that amount are considered dividends subject to income tax but not payroll taxes.
  5. Switch your regular corporation to an S corporation. If you business operates as a regular corporation (known as a C corporation), investigate the tax advantages of electing S corporation status.

    A C corporation pays taxes on its income, and shareholders are taxes on corporate income a second time when its is distributed to them (usually in the form of dividends).

    In a S corporation, corporate income is taxes only once. Individual shareholders report the corporate income on the individual tax returns. Since the corporate tax rate maximum is now higher than the individual maximum, there can be significant tax savings in electing S status.
  6. Review you S corporation basis. If you operate your business as a S corporation, be sure that you have a large enough tax basis to deduct any losses sustained by the company.
  7. Hire your spouse and children to work in your business. Wages paid will be deductible by your company and taxable to the family member. Your child's earnings will probably fall in a lower tax bracket than yours. Your spouse's wages may provide the basis for making a IRA contribution of up to $2,000 a year.

    Payroll taxes apply to such wages; however, if you business is a proprietorship or family partnership, they do not apply to wages paid to your children under 18.

    Compensation paid has to be reasonable for the services performed.
  8. Never use the Internal Revenue Service as your banker. When cash flow is tight, you may be tempted to pay your suppliers first and payroll taxes to the IRS last. The IRS will take steps to minimize the liability as quickly as possible.

    Pay the IRS first and if you absolutely cannot, contact your local IRS office before they contact you.
  9. Keep good records for all business travel, meal and entertainment expenses. Travel that you do in conjunction with your business is deductible, but most business-related meal and entertainment expenses are only 80% deductible.
  10. Time equipment purchases carefully. It may no longer be good strategy to make business equipment purchases late in the year. Under tax reform you are required to adjust depreciation if you make more than 40% of your equipment purchases in the fourth quarter of the year.