July 2020

Selecting a Business Entity — Small Business Guide to Legally Reducing Your Tax Burden, Part 3

By Office Staff|2020-10-08T20:52:41-07:00July 30, 2020|Categories: Small Business Guide to Legally Reducing Your Tax Burden|Tags: Business Entity, C-Corporation, Limited Liability Company, Limited Liability Partnership, LLC, Partnership, S-Corporation, Sole Proprietorship|0 Comments

Welcome to Part 3 of our 12-part series on how to legally reduce your income tax burden. Here, we describe the five ways you can choose to organize your small business, and then we provide guidance on how to choose the best business entity for your business in the current environment.

Here’s a common scenario to get us started. You set up a limited liability company (LLC) or S corporation for your small business, and now you are all set in terms of protecting your personal assets from lawsuits and minimizing your tax burden, right?

Not so fast.

One of the most expensive mistakes small-business owners make is choosing the wrong business entity — the legal/financial structure within which the business operates.

Most business owners start as sole proprietors. Then, as they grow, they establish an LLC to help protect their personal assets from any lawsuits filed against the business. Many of these same business owners make the common mistake of assuming that an LLC allows them to file their taxes as a corporation and use that filing status to save on taxes. The fact is that an LLC is a legal entity, not a tax entity. Operating a sole proprietorship as an LLC won’t save you any money in taxes.

You want a business entity (or more than one business entity) that not only provides legal protection, but also maximizes your Continue reading… Continue reading… Continue reading…

Audit-Proofing Your Tax Return – Part 2 of Small Business Guide to Legally Reducing Your Tax Burden

By Office Staff|2020-10-08T20:53:36-07:00July 22, 2020|Categories: Small Business Guide to Legally Reducing Your Tax Burden|Tags: Audit, Deductible Expenses, Earned Income Tax Credit, IRS Audit|0 Comments

Welcome to Part 2 of our 12-part series on how to legally reduce your income tax burden. Here in Part 2, we going to allay fears you may have of being audited by the Internal Revenue Service (IRS).

While failing to plan ahead for taxes (the subject of Part 1 of this series) is probably the No. 1 mistake small business owners make, letting the threat of an IRS audit discourage you from claiming certain deductions or credits is a close second. Here at Stees Walker & Company, we encourage clients to claim every legally allowable deduction and credit. Failure to do so leaves money on the table — our clients’ money — and that’s something we just can’t tolerate. The fact is, your chances of being audited are slim.

However, we encourage you to assume you will be audited. What?

On its surface, that advice may strike you as a contradiction, but it’s really not. Assuming you will be audited simply calls for documenting all income and expenses, so in the event your business is audited, you have the documentation needed to prove your case. In other words, respect the IRS, but don’t fear it. Today’s historically low audit rates make it pay to be aggressive in claiming deductions and credits, but they is no excuse for careless accounting and record-keeping.

Afraid to Raise Red Flags?

As a taxpayer, chances are good that, at some time, you chose not to claim a deduction or did not claim the maximum you’re allowed because you were afraid “it would raise a red flag.” The fact is, audit rates are so low, most legitimate deductions simply aren’t likely to raise any red flags. Audit rates hit an all-time high in 1972 at one for every 44 returns the IRS received. But lately they’ve dropped to historic lows. According to the IRS, for 2019, the overall audit rate was just one in every 220 returns, or 0.45 percent of all returns.

Roughly half of those hinged on one issue — the Earned Income Tax Credit for low-income working families. The rest of the audits focused mainly on returns filed by small businesses — especially sole proprietorships and businesses that have plenty of opportunities to hide income. Examples? Single location restaurants and laundromats. (The IRS publishes a whole series of Continue reading… Continue reading… Continue reading…

Small Business Guide to Reducing Your Tax Burden Legally — Part 1: Tax Planning

By Office Staff|2020-10-08T20:54:48-07:00July 16, 2020|Categories: Taxes|Tags: 2020 Tax Brackets, Adjustments to Income, Itemized Deductions, Small Business Guide to Legally Reducing Your Tax Burden, Tax Credits, Tax Planning, Tax System|0 Comments

Welcome to Part 1 of our 12-part series on how to reduce your tax burden legally. Here in Part 1, we address the first and most important step — tax planning. As the old saying goes, “Failing to plan is planning to fail,” and this is especially true when you are trying to reduce your tax burden legally.

Consider for a moment the first time you drove a car? If you were doing it right, you spent far more time looking where you were going than where you came from. You don’t drive forward staring in the rearview mirror. Unfortunately, that’s how most tax “specialists” are geared. They spend so much time looking back at last year’s finances that they rarely advise their clients to look forward.

They can tell you all about what you earned and spent last year and how much you owe in taxes as a result, but they rarely think to tell you what you should do today to save on taxes next year. Even the few who do tell their clients what to do rarely tell them when or how to do it.

Taking a proactive, forward-looking approach with tax planning can simplify next year’s taxes and save you a considerable amount of money, especially if you’re a small-business owner. Tax planning provides small-business owners with two valuable benefits:

Benefit No. 1: First, tax planning is a key component in your financial protection. As a small to medium size business owner, you have two ways to increase your net profits: financial offense (earning more) and financial defense (spending less). For most small-business owners, taxes are the biggest expense, so a big part of playing financial defense involves reducing the tax burden. And you do that through savvy tax planning.

Benefit No. 2: Second, participating in tax planning almost always ensures results. You can spend a huge amount of time, effort, and money promoting your business with no guarantee of achieving positive results. In contrast, every tax-savings initiative you implement guarantees a return on your investment. But those guaranteed results start with planning. For example, you can’t deduct medical expenses paid out of a medical expense reimbursement plan if you haven’t set up such a plan ahead of time.

To get this series started, indulge us for a moment as we cover how the tax system works here in the United States of America.

Understanding How the Tax System Works

A general knowledge about how the tax system works lays the foundation for understanding specific tax-savings approaches we present later on in this post. Here’s a graphic demonstrating how the tax system works: Continue reading… Continue reading… Continue reading…

Introduction to Small Business Guide to Legally Reducing Your Tax Burden

By Office Staff|2020-10-08T21:00:37-07:00July 7, 2020|Categories: Business Taxes|Tags: Small Business Guide to Legally Reducing Your Tax Burden|0 Comments

If you’re like most small-business owners, you launched your business with a great idea for a product or service and a passion for delivering it to consumers or other businesses. You were probably unaware at the time of the heavy burden of managing your business, especially the complex financials, and especially those related to taxes. Like other business owners, you most likely started out not even knowing what you didn’t know, and that is perfectly understandable.

Surely you can’t be expected to know what you haven’t been taught, right? Unfortunately, the government (federal, state, and local) and their corresponding taxing authorities do expect you to know and follow the tax code. You have probably heard the edict, “Ignorance of the law is no excuse.” It’s true. In fact, what you don’t know about the tax code can cost you dearly in both penalties (for non-compliance) and overpayments (for not taking full advantage of your eligible tax breaks).

Many small-business owners are so afraid of the Internal Revenue Service (IRS) or so terrified of making a mistake that they end up paying more than their fair share in taxes — sometimes a lot more. And that makes those of us at Stees, Walker & Company, LLP want to scream. Why? Because we know that while making money is hard, keeping it is fairly easy, as long as you know what you’re doing and choose to work with a tax and financial planning firm like ours. And, for the most part, all that involves is knowing the tax code and keeping good records, both of which are our areas of expertise.

One way we can help without it costing you any more than your time is to provide free guidance and insight. As part of that focus, we’re launching an 11-part series here on our blog on how to reduce your tax burden legally. Starting next week and over the course of the next three months or so, we will be posting one part per week, each focusing in on a single technique for reducing taxes.

Here’s what we’ll cover in each part: Continue reading… Continue reading… Continue reading…