Business Tax Planning Information Center
Tax Planning - An Overview
Tax planning is a major concern for every business. Improper planning could result in several negative consequences, including an extremely high tax bill and an Internal Revenue Service (IRS) audit. In addition to the federal income tax, there are a number of other tax issues that a business must consider. There may be state tax, local tax, sales tax, payroll tax, employment tax, capital gains tax, estate tax and gift tax obligations for which the business must plan. A comprehensive tax plan can help ensure that your business complies with all the applicable tax regulations. A tax attorney can assist your business with creating a complete tax plan.
Business Entities and Taxation
When setting up a business, one of the first issues to decide is the form of entity that will be used. This decision will affect how the new business is taxed. For domestic entities, the main business forms include sole proprietorships, partnerships, corporations and limited liability companies (LLC). Each of these forms is treated differently for tax purposes.
Depending upon the type of entity, a business may have to file a tax return. The form that the business must file depends on the way in which the business is organized. For example, corporations file a Form 1120 or 1120-A; partnerships file a Form 1065; sole proprietorships file a Form 1040; and S corporations file a Form 1120S. To learn more about these entities and the tax implications, please review the "Business Organizations and Taxation" article.
Tax Planning Strategies
For many businesses, the most important tax planning issue is how to minimize tax liability. There are a number of steps that a business can take to reduce its tax obligations in a given year. First, the business should maximize its deductions. There are several federal income tax deductions available for businesses, including all business expenditures that are ordinary, necessary and reasonable. For example, if the business is able, it may consider purchasing office supplies and equipment that it knows it will use in the first quarter of the next year before year's end. The business may also want to consider paying bills in that last week of its tax year (the last week in December if the business follows the calendar year). Another way to reduce tax obligations is for the business to defer income. If the company's cash flow is steady, the business may want to consider recognizing income in the first week of the new tax year so that it is not included in the previous year's taxes.
Tax Planning for Home Businesses
Many self-employed individuals run businesses out of their homes and many employees use a home office to do some or all of their work. These individuals may be entitled to a home office deduction for expenses related to the business portion of mortgage interest, property taxes, rent, utilities, insurance, repairs and depreciation. A person can only use the home office deduction if the home office is used regularly and exclusively as a principal place of business or as a place to meet clients or customers in the normal course of business. The amount of the deduction depends on the amount of space in the home that is used for conducting business. If a separate structure on the property that is not attached to the home is used for business purposes, the taxpayer may deduct expenses related to it as well.
Corporate Alternative Minimum Tax
The goal of the corporate alternative minimum tax (AMT) system is to make sure that corporate taxpayers with significant income do not avoid tax liability by using deductions, exclusions and credits. S corporations and certain small corporations are not subject to the AMT, but all other corporations are. Tax liability is computed under both the AMT and regular tax systems and the results are compared. To compute the minimum tax, all corporate tax preference items are added up; the greater of either $10,000 or the "regular tax deduction" for the taxable year is subtracted; and this amount is multiplied by 15%. If the amount of AMT is more than the regular tax liability, the excess of AMT over regular tax is the AMT that the corporation owes.
Talk to a Tax Lawyer
A comprehensive tax plan can help your business comply with local, state and federal tax obligations. Having a tax plan in place can also result in your business maximizing its deductions and minimizing its tax liability. A tax attorney can evaluate your business' potential tax liability and help your business craft a comprehensive tax plan.
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