No one wants to pay more than they have to on their taxes. Incorporation is an excellent way to protect your assets and save money. Incorporated companies benefit from significant tax advantages and a reduced incidence of audit by the IRS. The following tips can help reduce your corporate tax liability.
1. Research a Business Structure
If you haven’t done so already, you should consider creating a business structure. Businesses without an official structure are automatically labeled as a sole proprietorship. Owners of sole proprietorships must list all of their business income and expenses on Schedule C of their personal tax return. This significantly increases the likelihood of a tax audit. Businesses that are incorporated may enjoy a lower tax liability and a reduced chance of audit. Not all business structures are created equal. Some are far more tax friendly than others, but the costs of setting up and maintaining an entity may outweigh the tax benefit. Before deciding on a business structure, research all the options to determine which will work best for your business. Your business plan will help to determine what type of entity you should set up. Some of the questions that you should consider are: How many owners do you expect to have for your business? How many employees? How much revenue do you project? What type of work are you doing? The business structure you choose should enable you to effectively reach both your business and tax saving goals.
2. Hire an Attorney
An attorney can help you create the legal documents you need to support the legal business structure and protect your personal assets. The attorney can also advise you on the various liability issues of each type of business structure.
3. Hire an Accountant
Once you have some idea of your business plan, an accountant can help you to determine which type of entity will work best to minimize your taxes in both the short run and the long term. For example, you might plan to start out as a single member LLC, but intend to take on a business partner in a year or two as your business grows. But if you intend to grow your market rapidly and sell your company, it might be more effective to incorporate and file as a C corporation. The tax code restricts the types of owners for certain entities and an accountant can help you understand these restrictions. Tax accountants understand the ins and outs of tax preparation and can help you to determine the most effective structure for your business plan, as well as help you to identify allowable deductions.
4. Keep Accurate Records and Learn About Deductions
Keeping extremely accurate records and learning about potential deductions can help you reduce your taxes and avoid tax audits. There are a number of tax deductions that you might not know about. It’s important to thoroughly research deductions and keep track of everything. A little knowledge and meticulous bookkeeping can go a long way towards reducing your tax liability.
5. Make Sure Taxes are On Time and Accurate
It’s extremely important to make sure that your tax returns are prepared properly and filed on time to minimize the chance that the IRS and state tax agencies will assess penalties and interest. An accountant can help you find allowable deductions and make sure that your expenses are reasonable for the type of business that you are engaged in. If you cannot file your tax return on time, you will need to file an extension and pay an estimate of tax due before the deadline. If you are unable to pay your taxes on time, the IRS offers a variety of programs that can help. Even if you are unable to pay, it is vital that you file your return by the due date, as penalties are much more severe for non-filers than for late payers.
Reducing your tax liability is possible with the right preparation and knowledge. Burdette Smith and Bish LLC offers comprehensive tax preparation and planning services for individuals, businesses, estates, trusts and not-for-profits in all states. Please contact us for more information.