How Can Entity Structuring Help my Business?
Determining the correct entity structure for your business can save you thousands of dollars in taxes if you set it up to optimize for the tax code. The Tax Cuts & Jobs Act of 2017 reduced U.S. corporate tax rates to a flat 21%, the lowest they’ve been in 80 years. But this only applies to C corporations and not the ever popular LLC structure.
Reduce as much as possible any tax liability and defer that liability for as long as possible. The C corporation has always been an optimal structure for many small businesses and professional practices. However, there are now new reasons for considering a C corporation structure.
Lowest corporate Tax Rate since 1939
Beginning in 2018 C corporate federal tax rates dropped to a flat 21%, the lowest they’ve been since 1939. So no matter how much income your C corporation generates it won’t be taxed more than 21% at the federal level.
This one aspect alone is good enough reason to consider using the C corporation as your chosen entity structure for your business. It just makes good business sense now to run the numbers and evaluate how your current entity structure measures up against the low tax C corporation.
We can help with those calculations to make sure all the factors are being considered so you have the right numbers to make an educated decision.
LLC IRS Compliance Campaign
On March 13, 2018 the IRS designated as a compliance campaign issue the underreporting of self-employment taxes by partners providing services to a partnership. This designation resulted in the IRS devoting an increased allocation of time and resources in auditing this issue which affects LLC members. Several recent court decisions have sided with the IRS in this area and because of the recent round of successful IRS efforts in the courts, along with the IRS's compliance campaign designation, we strongly urge all LLC taxpayer members to immediately reevaluate their reporting of self-employment income.
If you need help with how to do that we can work with you in assessing any risk you may be exposed to as a result of this compliance campaign.
Tax deferral Opportunities
Choosing your fiscal year end date is one of the most important decisions you’ll make when setting up your business structure. As a C corporation you have flexibility to choose your fiscal year end date which can be instrumental in allowing your business the opportunity to defer current tax liabilities.
When you set up a LLC or LLP the IRS automatically assigns your business a calendar year reporting method, which is why so many businesses close their books and end their year on 12/31.
However, choosing the correct year end date that takes into consideration the timing of your annual peak sales activity can defer your current tax liability by several months, allowing more time for your money to work harder for you.
If you’d like to know more about how this could work for your business we can help you evaluate the optimal fiscal year end date for your business.
Income Splitting
Setting up your business as a C corporation allows you to income split as it is appropriate. The idea behind this is to reach an optimal tax balance between your business & your personal tax situation so that your business & personal tax rates are equivalent or close to equivalent.
Splitting your income between your business and your personal entities allows you flexibility that is not available with LLCs and other entity forms.
