Basic Tax Planning Ideas for High & Middle-Income Business Owners
Here are some tax strategies to avoid:
- Sending money to offshore accounts and not disclosing it properly on the appropriate tax forms. Not reporting income earned outside the US is also not a good idea. The UBS tax scandal involving some 50,000 wealthy US taxpayers is an example. IRS has announced that they will step up enforcement action in this area of international transactions.
- Paying what might be considered “unreasonable compensation” to minor children or related persons in order to gain tax benefits. Document what services are being performed. There is a lot of flexibility in setting the salary, just don’t push it too far.
- Transactions between related parties – businesses and/or individuals - that don’t meet the “arm’s-length standard”. These transactions will, most likely, be set aside and restructured by IRS, which then would result in additional tax and, possibly, penalties.
- Tax-motivated transactions that lack substance. Simply put, do not structure a transaction to generate tax benefits but, rather do what you would do in the normal course of your business. Select the transaction that provides the most tax benefits but, only if there is a valid business reason behind the transaction in the first place.
- If you are the owner of an S corporation and you provide services to the corporation (most owners do) and you don’t pay yourself a reasonable salary (ie., you set your salary is too low in an effort to save on payroll taxes). IRS has audited thousands of tax returns for this issue and has prevailed on all challenges by taxpayers.
- Have books and records that are incomplete or inaccurate. At best, you are probably overlooking deductions and that will cost you money. At worst, in a tax audit, IRS may perceive the condition of your books as intentional, especially, if unreported income is involved, and that is a very serious problem to overcome. If you have trouble keeping up with your books, we can help.