Suffering from “post-tax blues” this year?

Every business is different—depending on your industry, size, and other factors—but when it comes to paying taxes, most small- to medium-sized businesses have a lot in common. We recently finished a very busy tax season, and afterwards, many business owners suffered from something I call the “post-tax blues”—the uncomfortable feeling that you paid too much in taxes.

Even though some business owners have a fiscal year that differs from the calendar year (and thus a different business tax return due date), all small- and medium-business owners still have to be concerned with filing (or extending) their own individual tax returns by April 15th. So the effects of the business results on their personal tax picture is very much felt around April 15th and the following months. Tax planning is one of the services I offer my clients, so today and in future articles, I’m going to share some ideas for you to consider that may help reduce your taxes in the coming years.

Do you have the best organizational structure for your business from a tax perspective?

The type of business structure has a large effect on the tax picture for businesses. The choices for small and medium businesses include sole proprietorship, partnership, “C” Corporation, Limited Liability Company (LLC), and “S” Corporation. There are many factors to consider when determining the best structure for your business, including tax, legal, business and personal issues, and preferences. Partnerships are selected less often these days, for a variety of reasons, so I’ll focus on the tax issues for today’s most popular structures.

Sole Proprietor

From the IRS standpoint, a sole proprietor business is really just an extension of the individual. The business results are reported in a 1040 individual tax return on a Schedule C. All profits and losses from the business flow directly into the personal adjusted gross income (AGI) on the tax return (individual or married-filing-jointly). The business income is subject to income tax and self-employment taxes (Social Security and Medicare taxes). This is the simplest structure for tax preparation, but it also limits flexibility and can result in higher self-employment taxes.

“C”  Corp

A “C” Corporation is appropriate for a business where there are multiple shareholders. The shareholders are willing to invest, but may not all be involved in the day-to-day management of the company, and don’t want their personal taxes directly affected by the ups and downs of the business. The corporation must file a corporate tax return each year, and the profits or losses of the corporation don’t flow through to the shareholders except as distributions, such as dividends, or in the gain or loss on sale of stock. For a small or medium business that has only a few shareholders who run the business, there is a tax disadvantage. Any profits are taxed twice, both in the corporation and then again when dividends are distributed to the shareholders. However, there are times when the full separation of the business from the individual for tax purposes in a “C” corp can be advantageous from a tax perspective.

LLC or “S” Corp

LLCs and “S” corporations are becoming very popular for liability protection reasons. When created and maintained properly, they can protect the personal assets of the owners from the liabilities of the business. For both LLCs and “S” corps, there is no double taxation, because the profits and losses flow through to the owners’ personal tax returns.

LLCs can be useful for a variety of situations, such as real estate ownership across multiple owners or members. For a single-owner LLC, taxes are filed on a Schedule C in a 1040 form, similar to a sole proprietorship. For multiple owners or members, the LLC files taxes on a separate business tax return.

“S” corps are becoming popular for tax reasons because they give small business owners more flexibility in characterizing income received from the corporation, without double taxation on the profits.

“S” corps are a good choice for a company with a small number of owners (shareholders), where the shareholders are actively involved in the business management and operations. Taxes are always filed on a separate corporate tax return, but the profits and losses flow through to the individual’s adjusted gross income (AGI) by means of a K-1 form used as input to individual 1040 tax returns. Profits and losses affect the shareholder’s AGI in the year of the business results, usually whether or not money is taken out of the corporation or additional money is invested in the corporation by the shareholder. (An exception to this can occur for a loss where the shareholder’s investment in the company is less than the amount of the loss.) There is also some control for the shareholders over how much of the income is subject to employment taxes, although a reasonable amount of income for active participants in the business must be taken as wages, subject to Social Security and Medicare taxes.

I hope this information has given you some understanding about the alternatives available to you as a small- or medium-size-business owner. I highly recommend you seek the advice of a CPA who is knowledgeable in the area of business taxation before you make a decision about which structure is best for your business.

In future articles, I’ll share ideas for other ways to reduce taxes and avoid the “post-tax blues” next year.

About Irene Meyer-Lopez

Irene Meyer-Lopez is the President of Meyer-Lopez & Associates, Inc. and has been a CPA for 22 years. She also has extensive business experience and is a Certified QuickBooks Pro Advisor. She and her firm provide a full set of services for small to medium-sized businesses, including accounting, financial statement preparation and review, bookkeeping, tax preparation and planning, payroll, incorporation, corporate minutes and filings, human resources support and business advisory services. You can learn more about Irene and contact her through her firm’s web site:

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