Small Business Tax Strategy Solutions
Your tax expert partner and resource.
Choosing the right business structure and tax election is a crucial step in minimizing your tax burden. The structure you choose affects how you and your business are taxed and can have a significant impact on your tax rate. At Omni Resources, we will help you navigate the options and select the legal and tax structure that best aligns with your business goals and profitability.
Partnership
Summary: The business does not pay corporate taxes; instead all profits, losses, deductions, and credits are reported on the owners’ tax returns and business tax is paid at the personal income tax rate.
Rule of Thumb: Best when <$75,000 profits per owner
Tax Forms and Rate: Businesses with more than one owner file an informational return of the allocation amongst owners (Form 1065).
Each owner reports his share of company profits, losses, deductions, and credits on his personal income tax return (often Schedule 1040 Schedule C). You will pay taxes for your portion of business earnings at your personal income tax rate.
Owner-employees are also responsible for self-employment taxes (15%).
Partnership
Summary: The business does not pay corporate taxes; instead all profits, losses, deductions, and credits are reported on the owners’ tax returns and business tax is paid at the personal income tax rate.
Rule of Thumb: Best when <$75,000 profits per owner
Tax Forms and Rate: Businesses with more than one owner file an informational return of the allocation amongst owners (Form 1065).
Each owner reports his share of company profits, losses, deductions, and credits on his personal income tax return (often Schedule 1040 Schedule C). You will pay taxes for your portion of business earnings at your personal income tax rate.
Owner-employees are also responsible for self-employment taxes (15%).
S-Corp Taxation
Summary: Like a pass-through entity, all profits, losses, deductions, and credits are reported on the owners’ tax returns and business tax is paid at the personal income tax rate. Owner-employees realize savings on self-employment taxes. S corporations are responsible for tax on certain built-in gains and passive income.
Rule of Thumb: Best when $75,000-$250,000 profits per owner
Tax Forms and Rate: S corporations are responsible for tax on certain built-in gains and passive income and must file Form 1120S.
Each owner reports his share of company profits, losses, deductions, and credits on his personal income tax return (often Schedule 1040 Schedule C). You will pay taxes for your portion of business earnings at your personal income tax rate.
Owner-employees only pay self-employment taxes (15%) on the “reasonable salary” they pay themselves.
C-Corp Taxation
Summary: C-Corporations suffer from double taxation: the corporation pays taxes on profits then shareholders pay taxes on their distributions. C-Corp taxation is appropriate when the benefits of deducting employee contributions and income splitting outweigh the costs of double taxation. Small businesses that will re-invest most of their profits in the business can benefit from the low tax rates on retained earnings.
Rule of Thumb: Best when $250,000+ profits per owner
Tax Forms and Rate: C corporations pay taxes at corporate income tax rates. This is reported on Form 1120.
Each owner reports wages and distributions on his personal income tax return (often Schedule 1040). You will pay taxes only for wages and capital gains at your personal income tax rate. The distributions suffer from corporate double taxation since both you and the corporation are paying taxes on these earnings. Wages are deducted from corporate revenue prior to paying corporate income taxes (they do not suffer from double taxation).
The employer and employee each pay their share of employment taxes on wages.
Business Tax Saving Strategies
We work with your existing CPA or connect you with one of our partners, and structure your business to be as tax efficient as possible.
Business Tax Saving Strategies
- Sole Proprietorship: Simple to set up, but the owner is personally liable for business debts and taxes.
- Partnerships: Two or more people share ownership and profits, and personal liability is shared.
- Limited Liability Companies (LLCs): Offers flexibility and pass-through taxation, with limited personal liability for owners.
- Corporations (C-Corp or S-Corp): Separate legal entities from their owners, offering potential tax advantages but with more complex filing requirements.
- Doing Business As (DBA): A fictitious name used by a sole proprietorship or partnership. It doesn’t create a separate legal entity from the owner(s).
- Nonprofit Corporations & other nonprofit structures: These structures are formed for charitable or social welfare purposes and have specific tax-exempt qualifications.
- Limited Liability Partnership (LLP) and Limited Liability Limited Partnership (LLLP): Variations of LLCs offering additional liability protection for certain professions.
- Professional Corporation (PC), Professional LLC (PLLC), Professional LLP: These structures are used by professionals like doctors, lawyers, and accountants to limit liability.
- Close Corporation: A corporation with a limited number of shareholders and restrictions on stock transfer.
- B-Corporation: A for-profit corporation certified to meet specific social and environmental standards.
Common Tax Structures
- Partnership or Sole Proprietorship: Income is passed through to partners or the solo proprietor, respectively, who then report it on their individual tax returns. This is generally best for $75,000 or less in profits per owner.
- S-Corp Taxation: Profits, losses, deductions, and credits flow directly to owners’ personal tax returns, where business tax is paid at individual rates, offering owner-employees savings on self-employment taxes. This is generally best for owners with $75,000 – $250,000 in profits.
- C-Corp Taxation: C-Corporations face double taxation where both the corporation and its shareholders are taxed. Opting for C-Corp taxation becomes advantageous when the perks of subtracting employee contributions and dividing income supersede the expenses incurred from double taxation. This option is best generally when owners see more than $250,000 in profits.
- 501(c)(3): A 501(c)(3) organization, commonly referred to as a nonprofit, is exempt from federal income tax. This exemption applies to non-profit organizations that operate for charitable, religious, educational, scientific, or literary purposes, among others. The key aspect of a 501(c)(3)’s tax structure is that while it does not pay income taxes on donations received or money earned through activities related to its nonprofit mission, it must adhere to strict regulations.
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