Death and taxes. These are two guarantees in life, but you shouldn't be stuck overpaying taxes.
Paying the government doesn't always feel great, and overpaying taxes feels worse. Do you feel a pinch of pain when the government separates you from your hard-earned money? If so, you're in luck.
This article doesn't list every tax-saving strategy available to you.
What we'll show you instead is a handful of strategies that work. These strategies are easy to execute for your business and can potentially lessen your tax burden.
When you set up your business, you should make sure that you have an effective entity structure. Typically, your options are an LLC, sole proprietorship, an S-Corp, or C-Corp, depending on your financial situation.
An LLC enables you to access a swath of tax benefits you might not otherwise have as a sole proprietor. Using an LLC as your business entity might save you from overpaying taxes.
The primary strategy for tax savings via an LLC is pass-through. Pass-through is when an LLC's earnings are "passed through" to you, the owner. You do not have to pay corporate federal income tax on the income.
Another thing is that the income from an LLC isn't subject to withholding tax. Instead, you'll file tax payments every quarter for federal income tax.
You can choose how you'll be taxed as an LLC by filing an IRS Form 8832. But, there are some limitations.
An LLC with more than one owner cannot choose to be taxed as a sole proprietorship. Typically, the government will tax your LLC as a partnership if you have multiple owners.
The IRS views you and your business as a single entity. On the one hand, you have a level of freedom. On the other hand, you have additional tax responsibilities.
You can avoid overpaying taxes by leveraging:
The drawback to a sole proprietorship is that you have to pay the self-employment tax in addition to income tax. Self-employment taxes include Social Security and Medicare taxes.
An S-Corp is a small business entity. It'sIt's separate from the owners, which means that neither the owners nor shareholders are responsible for the business's finances.
To form an S-Corp must have:
An S-Corp provides tax benefits mainly on self-employment taxes (SS and Medicare). That means you can avoid overpaying taxes. Keep in mind that an S-Corp must pay any employee a reasonable salary.
The following is an illustration for educational purposes.
Suppose you are self-employed and make $100,000. You would owe $15,300 in self-employment tax.
In an S-Corp, you earn that same $100,000. In this example, you pay yourself a reasonable salary of $50,000. Only that $50,000 salary is taxable at 15.3% totaling $7,650. Compared to the self-employed taxes, you would be saving $7,650.
The other $50,000 is a distribution reported on your income tax return.
Other tax savings might include:
A C-Corp is a business entity with room for growth and several tax benefits. It'sIt's a separate entity from its owners and offers a layer of protection to the owner's assets.
A C-Corp tax structure differs from an S-Corp or an LLC. A C-Corp has to pay federal corporate taxes, also called double taxation. On the surface, that sounds terrible, but a C-Corp has benefits that may prevent you from overpaying taxes.
A C-Corp is taxed as a corporation first, and then shareholders pay taxes on dividends personally. Here are the ways you offset that tax burden:
Another way you can avoid overpaying taxes is through innovative retirement funding. You can deduct the funds you set aside for your Solo 401K from your taxable income.
You use the power of Solo 401K to invest in real estate. Here is the process:
As a designated real estate professional, you aren't subject to the passive activity loss rule of IRS Sec. 469(c)(2).
As a real estate professional, you can avoid overpaying taxes because the passive activity loss rule doesn't apply to you. That means you can deduct losses from nonpassive income from your real estate business, including:
To qualify as a real estate professional, you have to pass three tests:
No one likes paying taxes. It's an even worse tragedy to overpay taxes when remedies are available to you.
To avoid overpaying taxes, employ the following strategies:
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Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.
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