If a business owner thinks that they are paying too much in taxes, they probably are.
When it comes to taxes, some companies pay little to none and other pay huge amounts. For example, companies like GE, Boeing, and IBM typically pay zero in US taxes. Another company that pays hardly any taxes, Apple. They made over 34 billion dollars a couple of years ago and paid 9.7% in taxes. The common characteristic of these companies is an aggressive tax avoidance plan. Most businesses do not realize that taxes are typically the third largest expense in a company behind materials costs and wages.
Most small businesses are typically set up as an S Corporation or an LLC and are done so for either asset protection or taxation savings. Companies set up a corporation and believe that is all that needs to be done. They forget about the fiduciary responsibilities of the company, such as holding a yearly meeting and keeping minutes of that meeting as set forth in the company’s by-laws. Other companies decide that personally loaning the company money is also okay without a promissory note with an implied interest rate, which is one of the many ways to pierce your corporate veil. One must also ask, have there been any tax law changes since you started your business? Was the way you were originally set up and taxed still the best possible way to be structured?
When you are set up as a sole-proprietorship, partnership, S Corporation or LLC, those entities are reported to your personal tax return. Therefore, making company profits additional to any W-2 wages earned by you and/or your spouse. The larger your income, the higher your tax bracket. The top tax bracket for personal tax returns is now 39.6%. However, people like Warren Buffet, Mark Zuckerberg of Facebook, and Larry Elision of Oracle only pay about 20% in personal income tax. If a small business owner pays anywhere from 25% to 39.6% in income tax that they must be making more money than GE, Boeing, IBM or Apple as well as Warren Buffet, Mark Zuckerberg or Larry Elision, right? False.
How can lower taxes be achieved?
Strategic companies might have two (or many, many more) entities. Small businesses could set up a c-corporation and an s-corporation so they can take advantage of all of the possible deductions. The c-corporation might not have a calendar year-end so that income can be timed and deferred. The company might choose to have one of the companies with only the key people as employees so that the benefit plan in that company can be enhanced. The c-corporation will show some income so it is taxed at a rate below the individual’s tax rate, but still taking caution to not get involved in double-taxation. The only way to be double taxed in a C-Corporation is to take a dividend. In a nutshell, forward thinking small businesses are actively trying to minimize their taxes instead of waiting to see what is due.
Tax law is black, white and gray. Most businesses venture very little into the gray. The gray is legal and legitimate; however, it is more aggressive than almost every small business’s approach. If you are never pushing into the gray, you are paying more than your fair share of tax and our president certainly appreciates it. If you believe the federal government can spend your money more wisely than you can, then continue to donate unneeded cash to our federal government.
Why doesn’t your accountant tell you this?
The simple answer is they can’t by federal law. Ever since Enron and WorldCom failed in 2001 and 2002, the federal government passed a law called Sarbanes-Oxley which today is simply called S”OX compliance. The legislation came into force in 2002 and introduced major changes to the regulation of financial practice and corporate governance and set a number of deadlines for compliance. The Sarbanes-Oxley Act of 2002 is mandatory. ALL organizations, large and small, MUST comply. Small businesses do not have all of the same rules as publicly traded companies, but it does mandate that your accountant needs to be either a tax compliance officer or a strategic tax planner. They cannot do both. In fact, if you look at any of your financials you receive back from your CPA, there is either a Circular 230 statement or a statement where – you provided the numbers and they take no responsibility for their accuracy. In fact, the business owner signs the return under the penalty of perjury if the numbers are not true and correct. The wording on the tax return is immediately above where you sign your name. You are responsible for your taxes. You are responsible for their accuracy. You are responsible for making sure that you minimize the taxes for the business and the business owner. You are responsible for accounting and tax compliance. So, why don’t small business owners do a better job of strategic tax planning? The answer is simple. Most small businesses are trained to believe that they owe whatever the CPA says that they owe and they do not know that there are options for them to put more money into their pockets rather than the government’s pockets.
Strategic Tax Planning is more than just saving money on taxes. Strategic tax planning is something that develops a Strategic Wealth Enhancement Plan comprised of specific business and tax related strategies for the Business and the Business Owner. It touches areas such as, tax savings, proper entity structuring, proper asset protection, wealth building, retirement planning, succession planning, proper compensation at the minimum tax rates, benefit planning and different forms of education funding.
If you are interested in finding out more about how your company can keep more cash in the business or keeping more cash personally, or to provide better asset protection for your company, please contact us to have a full tax review performed for your company.
At Cogent Analytics, we never stop looking for ways to improve your business and neither should you. So, check out some of our other posts for helpful business information: