For any business, taxation is an area where there really is almost no room for error. Additional taxes, interest, and penalties are just the tip of the iceberg for making tax-related mistakes. Poor record keeping practices can lead to an audit -- an expensive procedure that can require countless hours of record-gathering and preparation. In addition businesses that have to report financial information to shareholders, regulators and banks are under additional obligations to get it right or they could be subject civil and criminal penalties or shareholder lawsuits.
Talking to a tax attorney now is critical to your understanding of what the IRS and other regulators require. The following is a list of eight key areas when you should consult a business tax attorney for help.
AREAS OF EXPERTISE
Business Income, Deductions & Accounting Methods
Business gross income • Business deductions • Limitations on business deductions • Specific business deductions • Accounting methods • Comparison of accrual and cash methods • Changes in accounting methods
Legal classification • Nontax characteristics • Entity tax classification • Entity tax characteristics including favorable reallocation rules for LLC’s, disregarded entities and their effect on taxation, who can own stock in a sub chapter s corporation and other entities, limitations on different classes of equity for different entities, S elections for different types of entities and their consequences, S vs C corporation
Property Acquisition & Cost Recovery
Depreciation - Personal property - Real property • Different basis rules for different entities and suspended losses, Special rules - Immediate expensing - Bonus depreciation • Amortization • Depletion, 83 (b) 4elections
Realized and recognized gain or loss • Character of gain or loss • Depreciation recapture • Deferral transactions
Corporate Formations & Operations
Transfers of property to a corporation • Corporate taxable income • Book-tax differences - Common permanent book-tax differences - Common temporary book-tax differences • Corporate specific deductions • Compliance • Corporate alternative minimum tax
Corporate Non-Liquidating Distributions
Computing earnings and profits • Ordering of E&P distributions • Distributions of noncash property • Constructive dividends
Forming & Operating a Partnership
Flow-through overview • Acquiring partnership interests • Accounting periods, methods, and tax elections • Reporting partnership operations • Distributions • Loss limitations, Partnership Allocations, Sales and Exchanges of Partnership Interests, Operating Distributions, Liquidating Distributions, Terminations and Death of a Partner
Non-Liquidating Corporate Distributions
Stock redemptions • Partial corporate liquidations • Stock dividends • Taxable corporate acquisitions • Tax-free corporate reorganizations • Mergers & reverse mergers • Chapters • Corporate divisions • Carryover of corporate tax attributes to shareholders
DIFFERENT TYPES OF ENTITIES
They say that nothing is certain in life except death and taxes, but there are ways to minimize your corporate tax burden. Corporate tax is all about planning. The type of entity you choose, as well as other structural choices such as the ability to raise capital, are key components of getting the results you desire for both you and your shareholders. One of the many functions of a corporate tax law attorney is to help you decide which business entity you should establish.
A C-Corp is a standard corporate structure. If you establish a C-Corp, your personal and business finances will be kept completely separate so you are not personally liable in the event that a lawsuit is filed against your company. Payments made to officers of the corporation are wages that are subject to the FICA tax rate, which is lower than the self-employment tax that you would have to pay as a sole proprietor. In addition, corporations are taxed twice. First, you will need to pay a corporation tax on the income that is earned by the corporation. Second, you will need to pay personal income tax for any wages that are paid to you by the corporation. Because of this, many small businesses avoid using this type of structure.
Another option is to establish a business as a S-Corp, which is also a standard corporation, but one that is not taxed twice. If you file as a S-Corp, the company’s income will flow through the business to the shareholders, who will then be responsible for paying taxes on their income. The income generated by the S-Corporation will not be subject to corporate tax rates.
Limited Liability Company
Some businesses are established as a Limited Liability Company (LLC) instead of a corporation. LLCs are also “pass-through” structures, which means similar to the S-Corporation, the income passes through the business along to the shareholders. If there is only one member in the LLC, he will report the business’s total income as his own income on Schedule C of his personal tax return. If there are multiple members, each member will report a portion of the losses and gains on their 1040 forms. Members of a LLC will have to pay the self-employment tax unless the LLC elects to be taxed as a S-Corporation.
Profit sharing is much simpler with a LLC structure than it is with a corporate structure. If your business is established as a LLC, members can divide the total profits between the members of the LLC in any way that they please. However, distributing profits is more complicated with other business entities.
Other Considerations When Choosing An Entity
There are certain limitations that may affect the entity that is appropriate for your business. Did you know that:
- You cannot have more than 100 shareholders or one class of stock if you want to file as a S-Corporation
- The IRS does not allow you to have a second class of stock in a sub-chapter S-Corp. Given that, many people struggle with how to pay investors a preference when using a sub-chapter S-Corporation. The experts at Denver Law Group can show you how to use debt and convertible debt to meet your investors’ financial expectations
- If you or one of your entities owns a 1031 tax preference you can invest in real estate syndications as replacement property. Let us show you how.
- The IRS allows you to change valuations for tax purposes on assets held in an LLC if the valuation changes. You need to know the implications of this, for non-cash expenses, and we can help.
Learn more about the many corporation tax services that we offer to our clients by getting in touch with our law firm today. Call DLG Law Group at 303-758-5100 or contact us by filling out our online form.