There is some great information online these days about ways to save on your taxes, especially on the subject of small business tax advantages. There are certainly more small business tax deductions than there are for the individual taxpayer. That is why everyone should operate a small business in order to take advantage of all that is available in the tax code for small business owners.
Some of the best information I have found comes from a friend of mine who runs a national radio show, is both a CPA and attorney and also spends numerous hours keeping up on the latest tax codes and ways for small businesses to take advantage of the massive tax code created by the IRS. I will share more about that later.
For those filling out the standard 1040 tax form, the goal is to apply deductions to lower the adjusted gross income value at the bottom of page one. This can be accomplished in several ways, but most people don’t qualify for the deductions on the first page of the 1040 form. But, there are small business tax strategies that can be applied to accomplish lowering the adjusted gross income number before turning over the form and completing it.
In the adjusted gross income section at the bottom of the form, there are categories that allow the tax filer options to reduce there adjusted gross income. Several of them deal directly with those that own small businesses. This is where small business tax advantages come into play!
A small business owner has to decide what their business model will be: what will they sell, how will they make money selling it, and a host of other concerns including what will be the business structure that the owner will choose. A business has to choose a business entity for which the new business will operate. There are several choices. Let’s develop this idea further.
What is a Business Entity and What are the Small Business Tax Advantages of Each?
A business entity is an organization that is started by a single person, or multiple persons, in order to carry on a trade or business. Some of these entities are considered by the IRS to not be a separate entity from its owner. This is the case when it comes to sole proprietorships and limited liability companies.
The business entities I am going to talk about are a sole proprietorship, a limited liability company (LLC), and an S-Corporation. These are the best business structures, in my opinion. Each has there advantages, but there is one that is clearly best when it comes to small business tax advantages.
The sole proprietor type of business model is easy to launch. All a new business owner has to do to start their business is to decide what their business will be, and get started. The business uses the owner’s social security number for tax reporting to the IRS, and the business name is usually handled by using the owner’s name, and then “DBA”, and then the business name. For example, John Smith DBA The RV Inspector. This business entity is easy to get started and involves no setup costs.
But, if you look at the chart, you will see there are some small business tax strategies that are not available to the sole proprietor business model. First of all, there is no liability protection for the owner’s assets from the business. This is a big deal in a lot of small business models! For example, as an RV inspector, the sole proprietor type model might be a great way to start, but switching to another business entity will assure the best small business tax advantages!
A limited liability company is a better way to assure the separation of assets from the business owner. It also shows the businesses, clients, that the business is more professional in its approach. LLC companies are perceived as more credible compared to launching a DBA type business. There will be a little more paperwork, but the greatest advantage of the LLC is the asset protection and perceived professionalism of the business. This is a great choice for the small business owner, say an RV Inspector.
The business entity that is considered the best for the small business owner, and offers the best small business tax deductions, in this writers’ opinion, is the S-Corporation! I will show you why.
The S-Corporation offers the advantages of being a corporation. It shows the business owner is serious about their business and has taken the steps to appear so too there clients. There is asset protection as well as pass-through income that is not subject to FICA. This is a big deal! Saving on self-employment tax is a real benefit of the S-Corporation! With the new Section 199A twenty percent tax deduction that was released in late 2017, S-Corporations are even more attractive than the sole proprietorship and LLC business entities.
Let me demonstrate the power of the S-Corporation business model.
Based on what we have discussed so far, the LLC and the S-Corporation offer the best asset protection. Why is this important? Well, should things go south in dealings with a client who chooses to become litigious, you want to have your personal assets separated from the assets of the business. This is a huge topic when it comes to setting up a business entity based on the owner’s needs, so be sure to consult with a credible source before choosing the best way to go for your new business!
However, there are some basic ideas to keep in mind when it comes to the best small business tax advantages and the strategies that can be employed. And the LLC and the S-Corporation are the best way to go when it comes to asset protection!
But only one of these two can truly maximize your tax savings!
Now that we have gotten past the asset protection discussion, the next issue is how to maximize the bottom line income that the business creates. So Let’s look at an example as shown above.
If the business were to create $75,000 in revenue and have $25,000 in expenses for the tax year, the business would have a net taxable income of $50,000. The self-employment tax, or FICA, figured at around 15.3 percent would amount to $7,650 dollars. That’s terrible! Either the Sole Proprietor or the LLC would be subject to this type of self-employment tax costs. Once expenses have been deducted from the gross business revenue, the net amount is subject to S.E.T.
Is there a better way?
Let’s say the new business owner starts as a sole proprietorship or an LLC, and later decides to convert to an S-Corporation, or starts there business as an S-Corp, what are the possibilities here?
We will take the same example of gross revenues of $75,000 and $25,000 in expenses yielding a net of $50,000 dollars in business income. With the S-Corporation business structure, the business owner must draw a salary from the business. In this example let’s say that $25,000 is taken as W-2 wages and the remaining $25,000 is taken as a dividend or as pass-through income.
This is really cool! Only the $25,000 is subject to the 15.3 percent self-employment tax! In this example, this means a tax cost of $3,825. In the previous example, the tax cost was $7,650. When comparing these two examples, the S-Corporation saved $3,825! These savings more than cover the additional cost of setting up the S-Corporation and all the other costs that come with it! And, as revenue increases for the business, it just keeps getting better!
Now, let me tell you where you can learn more so you can save on the costs of starting and growing your business.
As I mentioned earlier, I have a reliable source for the kind of information I shared here.
Back in 2014 when I launched my business, I had to make the decision for the type of business entity that I would use. I had an S-Corporation for a previous business that I owned, so for me, it made sense to use that type again. The first time I had a CPA that took care of all the business details. But he never involved me in the details of understanding the real benefits of what was possible.
When it came to my new business I wanted to be more involved in the strategies that I could employ to maximize my financial position in the business. Through a reliable source, I came across an individual who could help my business to get started and to grow. As I mentioned earlier he is both a CPA and an attorney. That is quite a combination!
My business is now established after having been launched in March 2014. It continues to grow as I employ the techniques suggested by my friend. Anyone can work with him and his national company if they choose to. What I love best about his company is that he provides me with videos on an ongoing basis to help me understand the new tax laws, ways to take advantage of them, and ways to keep my business growing!
If you would like to follow the same path and use small business tax strategies and take small business tax deductions to maximize your tax position than check out this source! He can not only help maximize your business revenues but also assist with your personal wealth.
To learn more about the individual details of different business entities you can visit this post!