Saturday, February 14, 2015

Planning ahead can help lower taxes for corporations and limited liability companies

Business entities consist primarily of corporations and limited liability companies.
They are called “Business Entities” because they represent separate legal formations and provide some legal protection of owners’ personal assets.
What this means is that they have been officially established as reportable units for taxation as well as for other purposes.
C-Corporations are referred to as “Regular Corporations.”
They pay tax based on their own taxable income, at rates that are different from those of individuals.
This type of corporation lends itself to a more stable accumulation of working capital, providing greater means to invest in needed equipment or inventory.
A C-Corporation structure is a good candidate for manufacturing and construction in particular.
Large businesses that retain vast amounts of earnings and attract many investors are C-Corporations.
S-Corporations are entities whereby owners have chosen a corporation where individual shareholders are to be taxed for each shareholder’s portion of the taxable income.
S-Corporations are limited as to the number of shareholders that they may have.
This type of corporation lends itself more to businesses that do not require huge amounts of working capital or accumulation of earnings.
Businesses in service-based industries are good candidates for this structure.
Limited Liability Companies are entities where the owners are referred to as “Members” and not “Shareholders” as in corporations.
When an LLC is taxed as a partnership, which is the default entity reporting, then the LLC’s advantage may be limited.
An LLC is a strong vehicle for rental operations, particularly those that do not contain a significant number of properties, or generate significant amounts of revenue.

Strategic planning for tax minimization begins with the proper selection of an entity, given the nature of operations.
From there, two important realities need to be accepted by owners and operators that are affected by the tax plan.
First, an understanding that tax minimization needs to be accomplished by making decisions that minimize income tax in the long-term and not necessarily in the short-term.
Second, that tax planning decisions should be made primarily with the best outcome for the overall operations of the business in mind, and not the taxation issues by themselves.
Tax decisions are never as important as the health of the business, the latter of which may provide the means for everything else.

Amounts of taxable income and deductions are arrived at through the timing of both revenue and expense recognition.
The selection of a tax accounting method that best fits the circumstances is one of the first steps.
It is advantageous to select a method that delays the recognition of income, accelerates deductions, or both.

Tax preparation and filing of your returns, whether for businesses or for individuals, should be accomplished without surprises.
Planning can be done in a way that answers all the important questions before the end of the fiscal or calendar year, and leaves only finalizing the details based upon actual amounts.