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there are different tax benefits for different tax formations

Different business models are able to take advantage of tax benefits based on their structure. Business owners should keep in mind that the type of business formation chosen impacts costs, liability, and team configurations. 

Choosing the right model can set your business up for success because you understand the lay of the land, and avoid paying unnecessary taxes when the time comes. Let’s discuss the different business types and tax models associated with each. 

 

What are the Different Business Types?

There are four types of business formations: 

1. Sole Proprietorship 

This is the most typical structure businesses choose because the individual owns the entirety of the business him or herself. Any income you generate from this business, you can claim as personal income, rather than being required to file a business return. 

With sole proprietorship comes the responsibility for business debts, losses, and liabilities. Freelance workers are often sole proprietors. 

2. Partnership 

Businesses with partnership structures have a relationship between two or more people who carry out business responsibilities. They can be classified as:

  • General partnerships 
  • Limited partnerships 
  • Limited liability partnerships (LLP)

3. Limited Liability Company (LLC)

A Limited Liability Company is structured based on state regulations. An LLC in California will have different standards than an LLC in Georgia. Netsuite explains, “Depending on elections made by the LLC and its characteristics, the IRS will treat an LLC as either a corporation, partnership or as part of the LLC’s owner’s tax return (i.e. a “disregarded entity” with many of the characteristics of a sole proprietorship).” 

4. Corporation 

A business corporation is a group of people who have the authorization to act as the legal entity for the company. There is a distinction between the owners and the business itself, unlike a sole proprietorship. Corporations are separated into two categories:

  1. C corporation (C Corp): not a pass-through entity 
  2. S corporation (S corp): a pass-through entity 

 

How do Taxes Vary in Different Business Types?

Not all businesses pay the same taxes. Depending on their classification, different business types are structured to file differently. Consider the different structures, and which is most advantageous for your business before choosing your business type. 

Sole Proprietorship

These are considered pass-through entities, which means the business does not pay taxes. Taxes are “passed through” to the owner to file annually on tax day, April 15th. 

Other advantages include: 

  • There are minimum tax reporting requirements
  • The sole proprietor does not pay corporate business taxes 
  • It is an easy and relatively inexpensive structure to set up 
  • They pay taxes on the annual tax day: April 15th

Disadvantages are:

  • Personal tax liability 
  • Cannot take advantage of perpetual existence 

Partnership 

In a business partnership, the responsibility of the business is held between the partners- however many or few partners there are. Partnerships can benefit a business by providing expertise and added skills, but they may also impact the business if the partnership isn’t cohesive. 

The majority of partnerships pay taxes by the calendar year. According to IRS, “The partnership tax return is generally due by the 15th day of the third month following the end of the tax year.  

Advantages are: 

  • They are considered a pass-through entity 
  • They are not subject to business taxes 
  • It is an easy and relatively inexpensive structure to set up 

Disadvantages are:

  • Unlimited personal liability
  • Cannot take advantage of perpetual existence 
  • There must be a partnership agreement 

Limited Liability Company (LLC) 

In a limited liability company, the business owner’s financial liability is a fixed sum, based on their investment, not on their personal assets. 

Advantages are: 

  • Limited liability protects business owner’s assets 
  • There is a flexible management structure
  • Ability to choose a tax structure 
  • They do not pay corporate business taxes 

Disadvantages are: 

  • They are not recognized outside of the United States 
  • They cannot take advantage of perpetual existence 
  • Rules and regulations are mandated on a state, not a federal level

Corporation 

There are different tax advantages for C Corp and S Corp. C Corps pay taxes on the 15th day of the fourth month, which is typically April 15th since corporations generally follow the calendar year. S corporations also follow the calendar year and pay on the 15th day of the third month, which usually lands on March 15th. 

C Corp Advantages:

  • The business owners are privy to limited liability
  • The business can have an unlimited number of shareholders 
  • They can take advantage of perpetual existence 
  • IPO and outside investors prefer C Corps 

C Corp Disadvantages: 

  • The business must pay taxes twice: employee taxes and corporate business taxes
  • Not a pass-through entity 
  • They are more difficult and expensive to start 
  • They face more regulation and oversight 

S Corp Advantages:

  • The business owners are privy to limited liability
  • Pass-through entity 
  • They can take advantage of perpetual existence 
  • Do not have to pay corporate business taxes  

S Corp Disadvantages: 

  • Do not have unlimited shareholders- they can only have 100 shareholders 
  • They have strict qualifications 
  • Not recognized outside of the U.S, and not by all U.S. states 

 

A Final Word

Each business structure comes with advantages and disadvantages. Choosing the right structure depends on which fits your business model best. Learn more about the different tax rates each entity experiences in our article, here. 

 

there are different tax benefits depending on your business model

As you prepare your tax returns, stay up to date on when taxes are due, child tax credit payments, economic impact payments, and charitable contributions.

On January 24th, the Internal Revenue Service (IRS) announced the start of tax season. Now, the agency can accept federal income tax returns for 2021. With tax season officially in progress, the April deadline is quickly approaching. Organizing tax filing information well in advance, and understanding any tax changes for filing this year sets you and your business up for success. Avoid filing taxes last minute as you may make errors that can flag your business for an Internal Revenue Service (IRS) audit. 

Before filling out your business’ tax return, we’ve put together tips to help you successfully file this year. 

Tax Return Due Date

Each year, taxes are due April 15th. The date is unflinching unless it falls on a weekend. This year, the deadline is extended to April 18th for the majority of taxpayers because the 15th lands on Emancipation Day celebrated in Washington D.C. However, we do not recommend waiting until then to start assembling and filing your taxes. 

The following are the approved extensions to the April 18th deadline:

  • April 19th for taxpayers in Main and Massachusetts to observe Patriots’ Day 
  • May 16th for the victims of tornados in Illinois, Tennessee, and Kentucky
  • May 16th for the victims of wildfires in Colorado 
  • October 17th for taxpayers requesting an extension 

 

PPP Loan Deductibles   

Small business owners who applied for PPP loan forgiveness may need to look into different tax deduction strategies. Claiming PPP funds depends on if they were forgiven or not. Businesses that had PPP loans forgiven are not eligible to claim deductibles on their taxes because it is essentially “double-dipping.” However, businesses that did not have PPP loans forgiven can claim the expenses on their tax forms this year.  

 

Claim All Reported Income 

When reviewing your business’ tax returns, IRS matches what you reported as income to the 1099 – MISC forms your independent contractors fill out. IRS has a copy of the 1099-MISC forms your business receives and will cross check accurate reporting is made. If they find an error between the filings, the agency may flag you for an audit. 

Taxable and Nontaxable Employee Benefits 

Some employee benefits that employers give are considered taxable while others are considered non taxable benefits. All help retain top talent but come tax season, providing benefits that don’t cost your employees more when filing is a financially beneficial opportunity. 

IRS considers taxable benefits as:

  • Vacation expenses 
  • Bonuses 

Non-taxable benefits include: 

  • Accident and health benefits 
  • Educational assistants 
  • Employee discounts 
  • Meals 

Classify your business correctly

The various business classifications are taxed differently. Misclassifying your own business can lead to overpaying, or underpaying taxes. If the agency finds an underpayment of taxes, they will most likely open up an audit against your business. 

Different business classifications include:

  • Sole proprietorships 
  • Corporations
  • S Corporations 
  • Partnerships 
  • Limited Liability Company (LLC)  

Charitable contributions 

Businesses that give charitable donations help the community and can use their contributions towards tax deductions. The size of your business determines how much in charitable deductions you’re able to file. 

Qualified Business Income Deductions 

After 2017, IRS implemented the qualified business income deduction. This deduction states, “many owners of sole proprietorships, partnerships, S corporations and some trusts and estates may be eligible for a qualified business income (QBI) deduction.”

Through this change, certain business entities can deduct up to 20% of business income along with 20% for qualified real estate investments on filings. 

Transportation Costs

Businesses who use company car vehicles can use it as a deduction as well. If the vehicle is solely used as a company car, the entire cost can be used towards deductions. However, if the vehicle is split between personal use and business use, only the business use can be deducted. 

Deductions can be calculated through:

  1. Standard Mileage Rate 
  2. Actual expenses 

 

Keep Organized Records 

Having the receipts for business expenses makes claiming it as a deduction a smoother process. Not every expense claimed as a deduction needs the receipt to back it up, but it helps, especially if IRS decides to open up an audit against your business. 

Tips to Make Filing Easier This Year

Staying up to date on new tax updates is a great starting point to making filing easier this year. Another way you can make filing taxes as streamlined as possible is this year is to:

  1. Gather and organize your tax records ahead of time
  2. Accurately report income and expenses
  3. Make sure you’ve withheld enough

Planning for tax season ahead of time gives you the opportunity to file the most accurate returns possible. In doing so, you avoid triggering an IRS audit. If you are worried about flagging an IRS audit when submitting your business’s tax returns, read our article on six triggers of an IRS audit here

This 2022 tax season, stay updated on our tips for what to look out for when filing your business taxes to successfully file this year.

CPA vs Tax Attorney: What’s the difference?

In some cases, it may be difficult to distinguish what your CPA is capable of helping you with and which tasks are better suited for a tax attorney. Both are experts when it comes to tax matters but in different ways. 

While your CPA is an expert at preparing and submitting your taxes correctly, you’ll need a tax attorney in the event that Internal Revenue Services (IRS) notices inconsistencies in your tax submissions or if you’re the subject of an audit. In any case, you’re best off having access to both experts. 

What does a CPA do? 

A Certified Public Accountant (CPA) has a significant educational background under their belt. They are required to have completed 150 hours or more of undergraduate educational studies before passing an extensive CPA examination. 

Additionally, they have to commit to 120 hours of continued education every 3 years. As such, they considered some of the highest level experts when it comes to handling tax preparation. A simple way to think of CPAs is that all CPAs are accountants, but not all accountants are CPAs. The process of becoming a CPA is more complex than an average accountant. 

A CPA’s services are not often used by any average taxpayer but instead are usually used in more complex cases. CPAs know how to abide by federal laws while still minimizing your tax liability and maximizing benefits. Developing a strong ongoing relationship with a CPA may suit your needs if you are looking to build a long-term tax plan and need support sticking to it. 

CPAs are often capable of providing various services to their clients in addition to tax preparation. Some additional services they may provide include the following: 

  • Financial record review
  • Maximizing deductions 
  • Business structuring 
  • Health insurance selection
  • General accounting

Many people choose to have a go-to CPA available for support on a regular basis. If this is not the case for you, you may choose to consult them when:

  • Filing your taxes
  • Completing an application for a loan
  • Completing an internal audit
  • When reviewing tax payments and balances

Their skills and expertise are best suited to assist you when handling these situations. 

What does a tax attorney do?

While a tax attorney is still an excellent resource to taxpayers, they serve a different set of needs than CPAs. While CPAs are technically qualified to represent you before a court in the event of an audit, a tax attorney is likely a better choice in situations where you may be involved with trouble with tax authorities. 

Similar to CPAs, tax attorneys have to complete an intensive educational path before qualifying to satisfy their role. After completing a bachelor’s degree, they must complete a Juris Doctor degree and study to take the bar exam for the state in which they intend to practice. Once they have passed the bar exam, their license must be kept up with continued ongoing education. On top of that, many tax attorneys choose to pursue a Master of Laws in Taxation to further their specialization in their field. 

Tax attorneys specialize in the legalities of tax payment and their services are most often called upon in defense cases when taxpayers are faced with audits from IRS, EDD, or other federal tax authorities. While tax attorneys may have slightly varying specialties, one thing most tax attorneys have in common is expertise in tax controversy and dispute resolution. 

One of the benefits of working with a tax attorney is that only tax attorneys have an attorney-client privilege that protects communication between a client and an attorney. This privilege can restrict IRS and California State tax agencies from discovering information provided to attorneys in confidence.

Tax attorneys fulfill various services for their clients as previously mentioned. The following include the various reasons you may need to consult a tax attorney: 

  • IRS tax audits 
  • Criminal tax defense 
  • Reporting ownership of foreign bank accounts and corporations 
  • International business transactions 
  • Tax disputes and IRS tax collection 

Who can represent your business during an SBA PPP Loan Forgiveness Appeal?

SBA has started giving loan forgiveness for businesses that used the PPP loans during the early stages of the pandemic. However, businesses deemed to have not used the funds as they were intended received loan forgiveness denials. 

If SBA denied your business’s loan forgiveness application, they will send an SBA Final Decision Letter in the mail. If you wish to appeal your forgiveness denial, you must reply and submit an under 20-page appeal 30 days before the date printed on the decision letter. Submission after the 30-day mark forfeits your appeal rights and will require you to repay the full PPP loan amount. 

Only three people can legally represent your business during an SBA PPP Loan Forgiveness Appeal:

  • An attorney
  • Shareholder owner
  • An officer

Those who are not legally entitled or allowed to represent businesses during an SBA appeal include: 

  • Certified Public Accountants (CPAs)
  • Lenders 
  • General Employees

An attorney is legally entitled and allowed to represent your business during the appeals process. They will be able to research why your application was denied, collect supporting evidence, and create the 20-page appeal for SBA.  

Final Thoughts

While CPAs and tax attorneys both work within a similar framework, their unique specialization equips them for varying roles. In some cases your business may only need to use the services of one or the other, however, in most cases, the two roles complement one another. While your CPA may be an excellent ongoing partner to assist with the day-to-day management and filing of your taxes, they may not be the best-suited partner in the event of trouble with tax authorities. 

Rather than challenging your CPA to attempt to manage tasks outside of their usual specialties, reach out to an experts attorney to assist with any legal tax concerns you may have. Curious about what you should be paying for a tax attorney? Read our article here explaining different instances when hiring an attorney may be worth your while. 

 

CPA vs Tax Attorney: What’s the difference?