No, this is not another blog about lame tax ideas. Big Business has many tips that are not known by most CPAs. The best five tax planning tips are:
1. Use more than one entity. Have one use the accrual basis of account. This allows you to avoid taxes on prepayments (more on this link) and expense costs before they are paid. Have one entity be a corporation. Corporations can be taxed as a separate entity (which means they pay their own taxes) or a pass through (by election subChapter S of the tax code).
Each of these corporate taxation methods has a unique advantage. For a start-up, the separate entity has the benefit of allowing you be late on paying income tax on the profits. Thus, you have more money to invest in growth.
Have one corporation doing business in a tax-free state such as Nevada.
2. If you have only part-time employees or no employees fund your business with the little-known tax savings of a solo 401K plan (more on this link). This works only if you have no full-time employees. Big businesses use the ESOP retirement plan. It is a fantastic tool but most small business can not afford the annual compliance cost.
3. If you make sales via your website, place your website on a server in a tax-free state (learn more here), Also, have the server and website owned by a corporation in the same state. If your website sells a service or another intangible item, use a tax haven corporation to own the site. The server needs to be in the same country as the corporation.
4. Use an irrevocable non-grantor trust to own any passthrough entities. Of course, have the trust in a tax-free state such as Nevada. A non-grantor trust has almost no audit risks. This type of a trust files its own tax return (Form 1041) and pay its own taxes. By moving income to this return, you have a lower “adjusted gross income.”
A lower adjusted gross income allows you larger itemized deductions and more tax credits. It also reduces your chances of a tax audit.
5. Don’t rely upon year-end planning. It is a suckers move. Usually, you end up spending money to be able for a deduction. Big Business plans a year in advance and not a month before year end. Each time they add a product or service, they think about tax planning. The most effective tax planning looks at income and not expenses.
If you need help creating a strategic tax plan, then contact me, Brian Dooley, CPA, MBT at 949-939-3414. A recent Government study showed that tax planning businesses are taxed at 14%. For every one dollar spent in tax planning, ten dollars are saved in taxes.