How to lower your tax burden

HomeColumnsAl's ColumnHow to lower your tax burden

Roman Basi with Al's columnBy Roman Basi It’s tax season. And that means taxpayers and business owners want to pay as little money to the federal government as possible. Tax deductions, tax credits and other means of reducing your tax burden are good throughout the year. But when was the last time you evaluated the taxation structure of your entity?

While some small businesses fall under sole proprietors (where income is reported on an individual’s Schedule C) or partnerships (where income is reported on a business’ Form 1065), others may prove to be more beneficial to elect either S corporation or C corporation status with the Internal Revenue Service in an effort to minimize their tax burden.

S corporations are entities that elect to pass corporate income, losses, deductions and credits through to their shareholders for federal tax purposes. Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. This allows S corporations to avoid double taxation on the corporate income. S corporations are responsible for tax on certain built-in gains and passive income at the entity level.

To qualify for S corporation status, the corporation must meet the following requirements:

  • Be a domestic corporation
  • Have only “allowable” shareholders (may be individuals, certain trusts and estates, but not partnerships, corporations or non-resident alien shareholders)
  • Have no more than 100 shareholders
  • Have only one class of stock
  • Not be an ineligible corporation (i.e. certain financial institutions, insurance companies and domestic international sales corporations)
  • File a Form 2553 (Election by a Small Business Corporation)

Structure of a C corp

C corporations operate quite differently. In forming a corporation, prospective shareholders exchange money or property (or both) for the corporation’s capital stock. A corporation generally takes the same deductions as a sole proprietorship to figure its taxable income. A corporation can also take special deductions. For federal income tax purposes, a C corporation is recognized as a separate taxpaying entity. A corporation conducts business, realizes net income or loss, pays taxes and distributes profits to shareholders. All C corps pay a flat 21% tax rate on net business income.

The profit of a corporation is taxed to the corporation when earned, and then is taxed to the shareholders when distributed as dividends. This creates a double tax. The corporation does not get a tax deduction when it distributes dividends to shareholders. Shareholders cannot deduct any loss of the corporation.

While C corporation profits are taxed twice, since the 2017 Tax Cuts and Jobs Act was signed into law, C corporation taxes are a flat 21%. Individual federal income tax rates can go as high as 37%. Another change with the 2017 tax law is that owners of pass-through entities like S corporations may be able to deduct 20% of the business income from their individual tax returns. C corporation owners are not afforded that luxury. If an individual’s personal tax rate is greater than 21%, it may be worthwhile to consider converting to a C corporation.

If you own a small business and have any questions regarding tax structure, reach out to The Center for Financial, Legal and Tax Planning at 618. 997. 3436.


Roman Basi is an attorney and CPA with the firm Basi, Basi & Associates at the Center for Financial, Legal & Tax Planning. He co-authored the article with Michael Hampleman, associate attorney. For more information, please visit taxplanning.com.

Must Read

Design Week kicks off in Chicago

Chicago—Two commercial shows—NeoCon, the largest commercial design showcase in North America; and Design Days, the new kid on the block that has drawn significant...

Daltile hosts A&D community during annual ‘Parked at NeoCon’ event

Chicago—Daltile welcomed architects and designers to its Design Studio here for the company’s annual “Parked at NeoCon” lunch. The event showcased the brand’s exciting...

Bjelin’s Woodura wins NeoCon award

Chicago—Bjelin’s durable Woodura hardwood flooring has won the Best of NeoCon 2024 Award. This award recognizes ideas that show innovative and sustainable design. “We’re honored...

Award of Excellence: Mohawk, EF win Best Overall

Garden City, N.Y.—Winning never seems to get old for Mohawk and Engineered Floors, which once again proved to be the big winners in FCNews’...

Mohawk elevates Jason Randolph

Dalton—Mohawk has promoted Jason Randolph, formerly SVP, Karastan sales, to the position of senior vice president, residential sales. He assumes the position formerly held...

Tarkett, Mycocycle partnership aims to drive industry to zero waste

Solon, Ohio —Tarkett has formed a partnership with Mycocycle, a Chicago-based, nature-inspired biotech startup, in a move to drive the construction industry to zero...

As seen in

April 12/19, 2021

DOWNLOAD
Some text some message..
X