Tax Strategy Is Not Just For The End Of The Year

At the beginning of each year, many people commit to New Year’s resolutions for changes they want to see in their lives. Did you know that it is also a great time to reflect on your business structure and assess the foundation upon which your 2022 tax strategy will be built? By beginning early in the year, a business owner may be able to take advantage of even more planning opportunities.

As with any business decision, an effective tax strategy should be developed holistically, considering all factors unique to your situation, and not focused solely on tax minimization. A great advisor can talk you through the options available to you. Leveraged opportunities in 2022, coupled with careful planning and a focus on the long-term financial health of the business, will position your business, and our community, for a prosperous new year.

Evaluate the Tax Classification of the Business

Many businesses are initially set up as Limited Liability Companies (LLC). This entity type has many benefits and remains flexible to adapt as your business grows. However, the IRS does not recognize LLCs as a business separate from the business owner for tax classification purposes. This means that for tax purposes, the business will be classified as either a sole-proprietorship or a partnership, depending on the number of business owners. One major disadvantage to this form of tax classification is that 100% of the business earned income is subject to employment taxes in addition to income tax. This can add a substantial tax burden on a profitable business.

Another tax classification to consider is electing to be taxed as an S corporation. This election informs the IRS that the business wants to be taxed under a corporate classification while still following rules similar to a partnership. One major advantage to classifying as an S corporation is that the business profits are distinguished from the wages paid to the owner for the services they provide. The profits earned, in excess of owner wages, are not subject to the additional layer of employment tax.

The filing deadline to elect S corporation status is March 15, 2022 for businesses with a December 31 year end wishing to be treated as an S corporation for the 2022 tax year.

The business structure selected has a significant impact on liability exposure and income tax considerations. Your advisor can help you understand how your structure will affect the business and identify your best option.