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]]>You know the drill. The Sept. 15th deadline is approaching, and there’s just one thing missing. You email the client. Then you send another reminder. Then another.
And… nothing.
You can’t finish the return without it, so now you’re spending your valuable time chasing a document instead of working on the next client.
Sound familiar?
The truth is, there’s no such thing as a perfect client. But there are some simple things you can do to make it much easier for clients to give you what you need and keep your practice moving.
Here are six ideas worth trying:
And here’s the important part:
Your clients aren’t necessarily trying to make your life difficult.
They’re busy, too. They may have forgotten, gotten distracted, or simply not understood what you needed. The answer isn’t necessarily to chase them harder. It’s to create a process that makes it easier for them to respond.
A little more communication, a little more clarity, and a few well-timed reminders can save you and your team a surprising amount of time.
And every hour you don’t spend chasing missing documents is an hour you can spend doing something more valuable.
This year, we hope your valuable time will be spent learning lucrative tax planning for your clients. There will be less prep and more proactive work to save your clients money and make your life more interesting and enjoyable!
Find out more. Book a call today!
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]]>The post Don’t Get Sneaky With C Corps appeared first on Certified Tax Coach.
]]>How do you get around the problem of double taxation? This is the big question to solve for any client with a C corporation. Unfortunately, taxpayers will sometimes try to apply tax reduction strategies without realizing the limitations—and very real consequences—in place. A major example is the practice of using a C corporation as an income “parking lot.” Business owners may not mind the flat 21% corporate tax rate offered by their C corp. The problem is that second layer of tax when distributions are made to shareholders. But what if they just never distribute that income, and shareholders therefore never have to pay individual income tax? If a tactic sounds too good to be true, it probably is. In this case, the IRS has rules in place to prevent this kind of behavior: namely, the personal holding company tax.
A business owner cannot simply stockpile money in a C corporation without distributing it. If they try to do so, they can get hit with a hefty 20% tax on that undistributed income. That’s on top of the 21% corporate tax they already owe. Now the big question is: does that apply to all C corporations and all income? If it did, this could create a lot of complications as the IRS tries to sort out who is holding income in the C corporation as a legitimate way to fund business operations and who is simply trying to avoid tax. To simplify matters, the IRS applies two tests to determine if a C corporation is functioning as a personal holding company.
These are the two factors to watch out for, lest your client’s business veer into “personal holding company” territory…
Let’s look at a common scenario where a business owner may unwittingly walk into the personal holding company trap. A high-income business owner decides to make investments through their C corporation to take advantage of that 21% tax rate. To avoid double taxation, they opt to keep the money in the C corporation. However, the investments start to perform unexpectedly well, and suddenly, that passive income makes up almost 60% of the corporation’s total AGI. Now that personal holding company tax is lurking on the horizon.
As their tax planner, you may be able to offer an easy solution. Make a distribution and focus on helping your client offset their personal taxable income rather than face that 20% penalty. In an ideal situation, you will have been working with the client long enough that this doesn’t sneak up on you, so that you are not in a hurry to make a distribution and can wait until a tax-advantaged moment.
A tax pro with a plan can still “wow” their clients with how low that C corporation tax bill can go. Taxpayers may not realize that there are simple strategies for reducing taxable income that don’t involve skating on the edge of the rules. For example, stockpiled cash can be used on federal and state income tax payments or payroll tax payments. State income tax payments can also be deducted as an “ordinary business expense,” thereby lowering the federal tax bill. For shareholders who work for the business, it may also be possible to offer cash benefits to cover their individual tax payments, which also conveniently lowers the company’s taxable income.
The American Institute of Certified Tax Planners trains our planners to see opportunities where others only see obstacles. “Quick fixes” are not necessary when you have in-depth knowledge of how to push the right tax levers and generate legitimate savings. With the right training, you can make finding the tax savings strategies that work for each entity type—even the tricky C corporation—look deceptively easy.
Hone your expertise and become each C corp client’s favorite person—sign up to become a Certified Tax Planner.
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]]>The post C Corporations Are For… Dragons? appeared first on Certified Tax Coach.
]]>Though C corporations are not known for being tax advantaged, these entities do come with hidden benefits if you know where to find them. If you’re a business owner in a high tax bracket, the flat 21% corporate tax rate can be an attractive perk. However, this can also lead to the temptation to leave income in the business eternally, since distributions get hit with a second layer of tax. “Holding” income in a C corporation can be an effective strategy if you’re simply looking to control the timing of those distributions. But if you try to use a C corporation as a vehicle for hoarding wealth, like a dragon guarding its treasure, you can’t escape the IRS. A little provision called the “personal holding company tax” prevents business owners from hiding income in their C corporations.
If you’ve never heard of the personal holding company tax, then perhaps you have never attempted to stockpile money in a C corporation without distributing it. This tax is designed as a deterrent to that type of behavior. A C corporation is not meant to be a tax avoidance tool for stockholders. So if a taxpayer is caught trying to circumvent the rules here, they could end up paying, not only the original 21% corporate tax but an additional 20% tax on that undistributed income.
To ensure you don’t get a hit with an unexpected penalty tax, you first need to understand what the IRS views as a personal holding company…
The IRS determines if your C corporation is a personal holding company based on two tests:
How might business owners fall into the personal holding company tax trap? Say a business owner has been taking most of their earnings and reinvesting that money in stocks, bonds, cryptocurrency, or any passive form of income. As a strategy, the owners might make that investment through the C corporation to lock in that 21% tax rate. Trouble comes if those investments start to turn a high profit, but the business owners are not distributing any of that money. When that passive income exceeds that 60% threshold, you may suddenly find yourself owing a personal holding company tax.
What’s the solution? Simple—make a distribution. The key here is to not let that moment sneak up on you, so ideally, you can make those distributions when tax is at its lowest.
With considerable strategy and intentionality, you can still see tax savings with a C corporation. For instance, your stockpiled cash can be used to pay federal and state income tax or payroll tax. What’s more, state income tax payments can become an “ordinary business expense” deduction that lowers our federal taxes. If certain shareholders also work for the business, you may also be able to offer cash benefits to indirectly cover their individual tax payments. This lowers taxable income for the C corporation itself while also covering costs for the shareholders.
If you know the legitimate strategies for tax savings in a C corp, you can make that entity choice work for you. Trouble comes to those who look for sneaky ways to avoid tax altogether—and find that the IRS was already steps ahead of them.
At the American Institute of Certified Tax Planners, we don’t need to rely on “hacks” and gimmicks to nab tax savings. When you know the actual tax rules, you are better prepared to avoid unnecessary penalties and to structure your income and expenses to give you the best advantages.
While C corporations are known for their tax challenges, some business owners will find that the pros outweigh the cons. If you can sidestep pitfalls like the personal holding company tax and maximize the benefits unique to C corporations, you might find that this is the best entity type for your tax plans. Turn to the experts when you need help navigating your business taxes—reach out to a Certified Tax Planner.
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]]>The post Who’s Afraid of the Big Bad C Corp? appeared first on Certified Tax Coach.
]]>C corporations have a reputation as the worst option for keeping your taxes low. Is that really the case? Those who disparage C corporations typically point to one significant downside: double taxation. In a C corp, business income is taxed first at the entity level and then again at the individual shareholder level. With double the income tax, it’s hard to imagine a C corporation being a tax-advantaged choice. Case closed?
The verdict here is actually much more nuanced. Savvy business owners know that every entity choice comes with benefits and drawbacks. Despite the default double taxation, C corporations also enjoy special tax breaks and enable certain tax strategies that are not available to other entity types. Did someone say “qualified small business stock”? This reveals a foundational truth of tax planning: the right entity type comes down to which tax advantages yield the highest savings for your specific business.
So if you have a C corporation (or are thinking of becoming one), how can you dodge that double taxation trap? As with any tax plan, you want to start by looking at the six basic tax levers: income shifting, deductions, loopholes, rates, investment strategies, and tax credits. Each of these levers functions differently within different entity types. So the first step is to understand where the tax savings options lie within a C corporation.
If you can maximize these C-corp-specific tax strategies, you may find that a lower tax bill is indeed within reach:
Before deciding to stick with a C corporation, make sure you’ve weighed the cons as well as the pros:
If you’re attracted by the QSBS benefits… keep in mind the date your C corporation was formed and when your stock was first issued. Only stock acquired after August 10, 1993 can qualify as QSBS. However, if it was acquired before September 27, 2010, the stock is only eligible for a 50% capital gains tax exclusion. Afterward, the benefit shifts to a 100% exclusion if the stock meets the other criteria.
If you’re drawn in by that flat 21% tax rate… keep in mind that Congress has anti-deferral rules in place. However, these rules largely apply to passive income and especially to investments in overseas companies. If you have a plan in place for when to make distributions, you can avoid potential penalties.
No one strategy offers limitless tax savings, so at the end of the day, it’s all about figuring out which ones yield the biggest benefits for your specific business.
At the American Institute of Certified Tax Planners, we know where to find hidden tax savings—no matter your entity type. By looking at tax planning as a system, we avoid the trap of categorizing certain entities as “low tax” and others as “high tax.” Instead, our tax planners create customized plans that take your priorities into account and make the recommendations that will best serve your needs. To get started today, reach out to a Certified Tax Planner.
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]]>The post Is There a Good Reason to Choose a C Corp? appeared first on Certified Tax Coach.
]]>The common perception is that C corporations are the worst option when it comes to keeping taxes low. The most-cited reason? Double taxation. C corporation income is first taxed at the entity level at a 21% flat rate. The second hit comes when those dividends are distributed to the shareholders—this time at personal income tax rates. That seems to settle the matter. After all, who would willingly sign up to pay double the tax?
This is where experienced tax planners can chime in with a word of wisdom. While C corporations can easily become a tax-heavy option, this entity type also comes with unique tax benefits that can sometimes outweigh the negatives. Case in point: qualified small business stock. To make the best use of the benefits, the key is to be proactive. When we work with clients on advance tax planning, tax savings are possible, no matter their business’ entity type.
When we’re working with a C corporation, how can we maximize tax savings and offset that double taxation trap? Start by looking at the six basic tax levers: income shifting, deductions, loopholes, rates, investment strategies, and tax credits. Then ask: which tax levers can have the biggest impact for a C corporation? By understanding how these work within a C corp specifically, we gain a clearer picture of the best strategies to apply.
With enough advance planning, these tax strategies can make a C corporation work for business owners who are able to maximize them:
Every upside has its downside, and so it goes with C corporations. Make sure you have factored in the limitations before recommending a tax plan. For instance, if you are planning to leverage QSBS benefits, do you know when the business originally issued that stock? If the stock was acquired before August 10, 1993, the QSBS provision had not officially been enacted yet—so sadly, that stock would not qualify for the benefit. On the other hand, stock issued between that date and September 27, 2010 is only eligible for a 50% tax exclusion. Only after September 27, 2010 did the 100% exclusion become available.
Limitations even come into play with the 21% corporate tax rate. Congress has anti-deferral rules in place to prevent taxpayers from parking passive income inside their C corporations. Though these rules mainly apply to passive income and investments in overseas companies, you need to be familiar with them to determine whether your client could owe unexpected taxes.
At the American Institute of Certified Tax Planners, we avoid assumptions about which entity types are “best” without getting to know our clients. Instead, we do the detailed analysis needed to actually see what the numbers say. If a new client already has a C corporation set up, the real question is: where are the tax savings opportunities for this particular client? And do the reasons they selected a C corporation still make sense given their current goals and financial situation?
Learn how to navigate the limitations and opportunities of each entity type like a pro—sign up to become a Certified Tax Planner.
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]]>The post Tax Saving Hot Spots: The Disadvantages of Partnerships appeared first on Certified Tax Coach.
]]>Every rose has its thorn, and every entity type has its tax disadvantages. Some entity types get more positive publicity than others, but in reality, there is no one structure that will work best for everyone. The trade-offs that lower taxes for one business could increase taxes for another business. So how do you go about measuring the perks against the drawbacks? A “pros and cons” list simply won’t work here. What you need is an in-depth analysis of your specific business to see which advantages and disadvantages will impact you the most.
When choosing your entity type, start with the foundation: What is the purpose of that entity type? For instance, partnerships exist because they are a simple way for multiple people to do business together. Partnerships are pass-through entities, designed to pass income and losses through to the partners without incurring a corporate level entity tax. They also offer flexibility in their structure—you can set up ownership how you want and determine how decisions are made.
These can be major benefits, but the question is whether these perks best meet your business needs? Because multi-owner businesses are taxed as partnerships by default, owners sometimes don’t stop to question if there is a better structure for them. Don’t let this be you. Talk to a tax expert to make sure you understand the reasons to choose a partnership—and the reasons not to.
So where might partnerships fall short? There are four key areas to consider:
Liability. For all their perks, partnerships come with a major flaw: unlimited liability for general partners. What does this look like? The general partner controls operations, but they are also personally responsible for all debts and legal obligations. This means that if the business is sued, creditors can go after the general partner’s personal assets.
Guaranteed Payments. Owners in a partnership cannot be paid as employees. Instead they must be paid through guaranteed payments. This setup can create complications. For instance, if the partnership agreement calls for $100,000 as your guaranteed payment but the partnership has a loss, the business still has to accrue the wage and pay it at some point. Unfortunately, this can cause an unplanned bump in income in a future tax year, resulting in higher taxes and limits on things like qualified business income. Since they are not treated as employees, owners also cannot receive tax-free fringe benefits.
Self-Employment Tax. This is often the factor that scares business owners away. Guaranteed payments are subject to self-employment tax. This can make partnerships an expensive entity type, depending on the exact pass-through amount. However, this does not mean a partnership is not the right choice. Depending on other factors in your business, you can pay self-employment tax and still end up with a lower overall tax bill.
No Stock Losses. Lastly, partnerships cannot issue stock. One of the tax benefits of stock is deducting losses. Certain small business stock can be deducted as ordinary losses, but the business must be a C or S corporation for that to happen.
When you work with a Certified Tax Planner, you can be sure that they will actually do the math. Instead of making a surface-level assessment, they dig into the details of your business and make recommendations that are tailored to you. Choosing the right entity type is an essential step, but it’s just the beginning of formulating an effective tax plan.
The American Institute of Certified Tax Planners does what it takes to earn your trust. Our coursework ensures that our tax planners know how to apply current tax law to your situation, what the ripple effects are of each entity choice, and how to identify the tax strategies that will work best for you. Redirect your energy toward growing your business, and put your tax planning in the hands of an expert. Reach out to a Certified Tax Planner.
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]]>Left to their own devices, some business owners would choose an entity type that is rumored to have tax advantages, cross their fingers, and hope for the best. Fortunately, with you on their side, taxpayers don’t have to rely on vague advice or blind optimism. Tax planners are worth their weight in gold because they investigate the pros and cons of any potential tax strategy before making a recommendation. This is especially true when it comes to entity selection. Tax planners know well that one choice determines so much of a taxpayer’s destiny.
You may find that many clients who own a partnership don’t fully understand the tax implications. It all goes back to the purpose of the partnership entity—to provide a simple way for more than one owner to go into business together. Some clients are drawn to partnerships because of their structural flexibility or pass-through entity perks. Others don’t realize they’re classified as a partnership until tax season rolls around.
No matter the details, it’s our job as tax professionals to question the entity choice and, when necessary, to introduce our clients to the downsides of partnerships.
The tax traps to watch for when it comes to partnerships mostly fall into four categories: liability, compensation, self-employment tax, and stock.
Weighing the disadvantages, examining the partnership agreement, calculating the tax bill if the business switched entity types: steps like these mark the difference between a reactive compliance-focused tax professional and a proactive tax planner. Our job is to have the hard conversations, identify other advisors when needed, and bring a higher level of critical thinking to the tax planning process. This is what allows us to charge a higher rate—and what makes our work well worth it for our clients.
You don’t have to read each of the 77,000 pages of U.S. tax code cases and regulations to be an expert. That’s because the American Institute of Certified Tax Planners has taken the complexities of tax law and broken them down into practical strategies you can bring to your client. Learn how to interpret the tax code while also discussing the most relevant tips and tactics for saving your clients money right here and now.
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]]>The post Tax Saving Hot Spots: The Advantages of Partnerships appeared first on Certified Tax Coach.
]]>Choosing your business entity type is one of the most important decisions you’ll make as a business owner. Do you want to establish a C corporation and take advantage of qualified small business stock and tax-free fringe benefits? Do you prefer to set up an S corporation so you can pass income and losses through to shareholders while avoiding self-employment taxes? Do you want the flexibility that comes with an LLC, which can choose to be taxed as any of the above?
Don’t make the mistake of defaulting to the “most popular” entity type or what you’re already familiar with. Entity type is a strategic tax decision and can be the difference between a hefty tax bill and massive savings.
What happens if you launch a business without doing your entity-type homework? If you don’t make an official election, by default the IRS will tax your business based on the number of owners. If your business has two or more owners, you will automatically be taxed as a partnership. This can come as a surprise to new entrepreneurs. Fortunately, partnerships do come with a number of tax benefits. Familiarizing yourself with these advantages is the first step to determining if this entity type is right for you.
Partnerships offer special tax advantages that do not exist in any other entity type:
Contributions and Distributions. In a partnership, these are generally tax-free. This is a notable distinction from corporations. You can contribute property into a partnership without triggering tax, and you can often take distributions out without triggering tax. This can be especially helpful if there is a mortgage attached to that property. Remember that generally tax-free doesn’t mean always tax-free. Under the anti-abuse rules, not every business will qualify, but if you do meet the requirements, a partnership can give you the adaptability to move value in and out of the business in a very tax-efficient way.
Special Allocations. This is the heavy hitter when it comes to partnership benefits. Special allocations mean that profits, losses, and deductions can be distributed however benefits the partners most. The distributions do not have to reflect the actual ownership percentages. So even if a partnership is owned 50/50, you can split the profits and losses 25% and 75% or even 0% and 100%. There are some limitations in place to ensure partnerships are not simply trying to evade taxes, but as long as you pass the IRS’ tests, you can leverage this customization to lower taxes for all the partners in your business.
How do you figure out how to allocate losses and income strategically? That’s a question to discuss with a Certified Tax Planner.
Partnerships make for one of the most flexible entity types. These multi-owner, pass-through entities allow you to determine how decisions are made amongst the partners and how finances are shared. In other words, we get to design the deal—and we do so through the partnership agreement. This is key when it comes to maximizing the tax advantages of a partnership. You want to make sure that your written and signed agreement reflects your overall tax strategy. Enlist the help of tax and legal experts to make your partnership arrangements work for you.
The American Institute of Certified Tax Planners trains tax planners to ask the tough questions that are needed to create the best tax plan for you and your business. Whether this means maximizing your entity type’s tax benefits or restructuring the business entirely, our experts will walk with you every step of the way. Tax season doesn’t have to feel like a roll of the dice when you have a strategy in place to secure real tax savings. Get started today by reaching out to a Certified Tax Planner.
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]]>The post Partnership Hot Spots: Leaning into the Tax Advantages appeared first on Certified Tax Coach.
]]>It’s a commonly-told story among tax planners: A client forms a business without deeply examining which entity type is actually the best for their tax bill. Fortunately, this is also a prime opportunity for you to be the hero. As tax planners, we know that no good tax strategy can be built on assumptions. A business owner may have heard that “S corporations are best” because they avoid double taxation or that “C corporations are worth it” because of the qualified small business stock tax break. The reality is that each business’ tax situation is unique, and your job is to ask the probing questions that will help them identify the best entity type for their needs.
A situation you may run into with inexperienced entrepreneurs is the “surprise partnership.” Two (or more) business partners launch a small company, and when tax season rolls around, they are surprised to find that the IRS is taxing them as a partnership. In fact, they may not even understand how a partnership functions—what its perks and limitations are. So they come to you to figure out if this is actually the best structure for their business.
Unlike a C corporation or S corporation, you do not need to file an official election to be considered a partnership. If a business has two or more owners, it is automatically deemed a partnership in the eyes of the IRS. Now this might be a blessing in disguise. With your expertise, you can help clients leverage the unique qualities of a partnership to optimize their tax savings. To do so, knowing the main tax advantages of partnerships is essential.
The good news for your client is that partnerships have tax advantages that do not exist in any other entity type. Say, for instance, a business owner has real property that they are hoping to transfer to their business. Under a partnership, they can typically contribute that property to the business tax-free. The same is often true for distributions—you can take value out of the business without triggering a tax.
The main benefit to highlight for your clients is special allocations. Special allocations provide an opportunity to customize how profits, losses, and deductions are distributed. The major perk here is that distributions do not have to match the ownership percentages. Partners can have 50/50 ownership of the business and yet split the profits and losses 25% and 75% or 0% and 100%. Of course, these allocations are subject to rules to prevent partners from simply evading taxes. But if your client passes the test, they can customize their distributions to create the most benefits for each partner.
When deciding which entity type to recommend to a client, it can help to get back to basics. Why does that entity type exist? What is its core purpose? Partnerships are intended to be an efficient way for two or more people to go into business together. As pass-through entities, they are more flexible than a corporation. Partners receive distributions of income and losses and have the opportunity to structure ownership in a way that works for them. Business owners who would benefit most from this flexibility and avoiding that corporate level tax should consider a partnership.
Whether the move is to convert to a partnership or pivot away from one, you can best serve your clients by challenging their assumptions and digging into what best meets their business needs.
The American Institute of Certified Tax Planners can help you offer the highest level of service to your clients. Our trainings not only introduce you to effective tax strategies—they also take you beneath the surface to better customize your approach to each client. With us, you can move beyond compliance to proactive tax planning, and build a business that sustains itself year-round.
Begin your journey today by signing up to become a Certified Tax Planner.
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]]>As a savvy entrepreneur, how do you decide which entity type is right for your business? Some business owners stick with what’s familiar, but they may be missing out on advantages that could boost their bottom line. Our rule of thumb is simple: aim for the lowest tax bill. This is easier said than done. Countless online articles and business influencers will offer their opinions about C corporations vs. S corporations vs. LLCs. But quick guides and A.I. summaries tend to skip over the nuances. The truth is that the most tax-advantaged entity type will depend on your specific business needs.
The bad news is there is no default correct answer. The good news is that a Certified Tax Planner can walk you through the pros and cons of each option as it relates to your unique business.
The short answer is “no.” Like with every entity type, S corporations have their upsides and their downsides. The key is to go into your tax planning conversation with an open mind. If you already made an S election, you likely had good reasons. No corporate income tax, lower self-employment taxes, and the ability to pass on tax deductions and credits to shareholders? All attractive benefits of an S corporation. But S corporations also have hidden tax traps, some of which can come from a C corporation switching to an S corporation.
These tax traps can be avoidable if you know what to look for—which is exactly what Certified Tax Planners specialize in handling.
If you are an S corporation owner or aspiring S corporation owner, educate yourself on both the pros and cons of your entity type. To make sure hidden tax consequences don’t take you by surprise, ask yourself these questions:
1. Has Your S Corp Sold Any Business Assets?
An S corporation is a pass-through entity, which means that suddenly any gains and losses from the business are passed on to the shareholder. So if your business makes a profit from selling any of its property, the shareholders are then responsible for paying taxes on that profit. The tricky part is that taxes owed are affected by things like the timing of the sale and whether the business took depreciation deductions. If you made a sale or are planning a sale, be sure to discuss these details with your tax planner.
2. Are You Planning to Deduct Business Losses Against Non-Business Income?
S corporation fans may like the fact that the business passes its losses onto shareholders so that they can use them for personal deductions. However, there is a limit to this perk called the “excess business loss limitation,” and it’s dependent on your annual income. If you are over the income threshold, this can dampen your plans to leverage business losses to lower your personal tax bill. When this is the case, work with your tax planner to determine if it’s possible to shift income or shift those losses to another tax year when you can really maximize that deduction.
3. Does your business have a significant amount of passive income? When you switch from a C corporation to an S corporation, these two things can get you in trouble: holding accumulated earnings and profits and having more than 25% of your earnings from passive income. If your business checks off both boxes, you can get hit with corporate income tax. What’s more, your S election may be deemed invalid. If this could be you, consult a tax professional to help you understand the rules around excess passive income.
Establishing an S corporation is not always a slam dunk tax planning move. The hidden tax traps may be easily avoidable for some businesses and difficult to circumvent for others. Whether you currently own an S corporation or you are considering making an S election, don’t take another step without enlisting a tax planner to conduct a full tax analysis. That one decision can be the difference between a hefty tax bill and thousands in tax savings.
Navigating the complexities of tax law can be intimidating, especially for small business owners with countless tasks on their plates. Don’t go through another tax season alone. At the American Institute of Certified Tax Planners, we train tax professionals to think beyond mere compliance and return preparation. Our tax planners know how to sift through the details of your financial situation to come up with a tax plan that is tailored to you—while also thinking about how to maximize savings in the years to come.
Recruit a heavy hitter to join your team today by reaching out to a Certified Tax Planner.
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