Why Am I Paying So Much in Taxes? Picking the Wrong Entity Type Can Cost You.

//Why Am I Paying So Much in Taxes? Picking the Wrong Entity Type Can Cost You.

Why Am I Paying So Much in Taxes? Picking the Wrong Entity Type Can Cost You.

If you’ve ever wondered, why am I paying so much in taxes? perhaps you’ve picked the wrong entity type or business structure for your business. Small business owners frequently make mistakes in this area that cost them a lot of money at tax time. The best structure for a particular business can vary based on a number of factors, and it is always best to discuss the matter with an expert. Here are some of the common mistakes they make.

They Think Structuring Their Business as a LLC Will Save on Taxes

They think, wrongly, that structuring their business as a LLC, or limited liability company, the least complicated business structure, will help them save money on taxes. This protects assets, and is good for holding partnership relationships between corporations or individuals and assets. Simply put, this business structure provides the limited liability of a corporation and the pass-through taxation of a sole proprietorship or partnership. Your personal assets are protected.

A LLC can be taxed as S-Corporation, or closely held corporation. It does not pay federal taxes but divides income or losses among shareholders. Shareholders have to report income or losses on their tax returns. It can also be taxed as a C-corporation, under which the business is taxed separately from the owners. Other businesses may also take tax write-offs. Being a LLC doesn’t necessarily save on taxes.

Two tax disadvantages of this kind of business are earnings are subject to the self-employment tax and appreciated assets are taxed. This is especially likely to occur if you convert an existing business to a LLC.

A LLC, however, is good for an owner who wants to separate himself from the business, without the formalities a full corporation has. A tax advisor can help with taxation issues.

They Think Structuring Their Business as a C-Corporation Helps Them Save More Taxes

Many small business owners believe this is best because, after all, all Fortune 500 companies are C-Corporations. Owners receive they receive the most deductions. The problem is, many of the deductions are unique to the big companies and don’t apply to small business owners. In addition, many small business owners could write the expenses off and not be taxed twice.

Under this model, the profits face taxes. If any of the owners take any of the profits home, they have to distribute them and be taxed on them, which can lead to higher taxes.

Many Small Business Owners Believe a Sole Proprietorship is Always Bad

Small business owners sometimes believe this, but sometimes this business model is best until a new business begins to grow. Don’t reject this model outright, unless you have financing available, partners, or it will be a large business.

Of course, you will self-employment tax on your profits, but you can deduct half the tax from your profit. For small businesses, it’s important to note this business model is simple, involves less legal formalities, and has less paperwork. It doesn’t protect personal assets, and, sometimes, you will pay more taxes under this model.

They Believe Establishing a Corporation Will Protect Their Assets Better than a LLC

Protect your assets instead by using your company name on all documentation, managing your company responsibly, following corporate procedures, and not commingling funds, rather than just being called a corporation.

If You Have an S Corporation, the IRS Will Likely Audit Your Salary Allocations

Many small-business owners know this kind of business model will save on self employment taxes. Could the IRS audit their salary allocations, however? Actually millions of S-corporation owners do this, and the IRS doesn’t spend an inordinate amount of time auditing them. Of course, be certain your annual payroll allocations are reasonable.

An S-Corporation does avoid double taxation and lowers self-employment taxes. There are additional administrative duties and paperwork, compared to a sole proprietorship, however.

Consult With a Pro

In short, there are many things to consider when choosing the best business model for you personally and picking one that will help you save on taxes. A tax professional is invaluable. For more information, feel free to contact us.

By | 2017-02-16T18:10:33-07:00 February 16th, 2017|Blog|Comments Off on Why Am I Paying So Much in Taxes? Picking the Wrong Entity Type Can Cost You.

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