Business owners should choose the structure of their business with an eye towards minimizing their taxes. Tax law is a complex subject, always changing and requires constantly study by lawyers and accountants who work in this field. The dedication and discipline yield rewards for their hard working clients in the form of lower tax bills. The goal is normally to mitigate tax liability. Before implementing strategies, you should consult a lawyer or accountant for the details relating to your specific business. Some very basic issues to consider include:
- Choose Your Structure: A limited liability company (whether single-member or multi-membered) can choose to pass through all the income or can choose to pay taxes as an S-corp. Salary paid to the owner is still subject to self-employment taxes, but profits may be treated differently in certain circumstances. The organization may benefit from adopting a structure that employs (a) a board of governors structure, or (b) a manager-managed structure or (c) even a member-managed structure. Each of these different formats have advantages and disadvantages that need to be considered. Different business structures have different rules and liabilities for the owners, so before finalizing the structure, work with your lawyer, accountant, and other financial advisor. With this input, you can make an educated decision.
- Document Your Programs: If you’re reimbursing for travel, entertainment, equipment, or other costs, the IRS requires that you document this with what’s called an accountable plan. The business can then deduct the expenses without reporting the reimbursements as employee income. For businesses where these reimbursements are significant, this can save on employment taxes.
- Look for the Best Deductions: Often, the IRS gives you options on how to deduct an expense, so you may want to compare the two to see which provides the best deduction. IF you use a car for work, for example, it may be better to deduct the actual costs of operating the vehicle instead of the IRS rate for mileage. In other cases, $0.535 per mile works out better. Similar decision apply to deducting home office expenses and equipment depreciation.
- Setting Up Benefit Plans: While your income from the business is taxable, there are some other benefits the company can provide tax-free. These may include medical coverage, life insurance, dependent care, transportation, some meals, communication equipment, and retirement plans.
Tax laws change, so be sure to have regular meetings with your lawyer and accountant to discuss changes in the regulations, changes in your business, and how to best structure things to keep your hard-earned profits. Lawyers attend continuing education classes throughout the year and read up on the changes in tax regulations, so they stay current on how to best help their clients.
The team at Virtus Law Firm are experienced business attorneys who can help you set up your entity the right way and then be by your side with good advice and counsel every step of the way from your first employee to making a succession plan. Give us a call at 612.888.1000 or email us at firstname.lastname@example.org to learn what adding good business legal and tax advice can do for your company.