Tax Planning for Small Businesses: Exemption Eligibility and Opportunities to Reduce Liability

With tax filing deadlines looming around the corner, many small business owners are scrambling to finish their taxes in a timely manner to avoid unwanted penalties and interest. At the same time, business owners should be careful to avoid leaving their hard-earned money on the table.

There are a wide range of exemptions available for small business owners, making it possible to deduct common business expenses from taxable income and thus lower a company’s tax burden in the process. However, there are a lot of nuances and other considerations that business owners should be aware of before they begin claiming any small business exemptions on this year’s tax return.

Possible Exemptions for Small Business Owners

Qualifying taxpayers who run their own small businesses may be eligible to claim any number of exemptions, including:

• Exemptions to using the accrual method of accounting
• Exemptions from maintaining inventories
• Exemptions from percentage-of-completion method for long-term construction contracts
• Exemptions from uniform capitalization (UNICAP)
• Exemptions from business expense limitations

What About Tax Shelters?

Also important to keep in mind when it comes to preparing small business taxes is that the IRS has strict definitions in place for tax shelters. Specifically, a tax shelter refers to any entity used by a taxpayer to reduce or minimize the amount of taxable income or tax liability owed to the IRS. It is worth noting that tax shelters are not illegal by any means, so long as they are held in accordance with Treasury regulations.

In some cases, a tax shelter may include a syndicate, which could have tax implications. In general, a taxpayer is considered a syndicate if all of the following apply:

• The taxpayer is generating losses for the current tax year
• The taxpayer is an entity other than a C corporation
• More than 35% of the business losses are being allocated to limited partners or entrepreneurs

If all of these situations apply, then a business owner may be legally considered a syndicate. As a result, business owners may need to change their accounting method for the following year. Business owners who are not sure whether they fall into this category are urged to consult with a financial advisor or tax professional, as syndicate status can have a major impact on taxes owed, exemptions, and other exceptions. In some cases, forming a temporary syndicate can also be useful for business owners who are preparing to make a large transaction, such as an acquisition or merger.

Determining Syndicate Status Based on Previous Years’ Taxes

Determining whether a taxpayer falls into syndicate status can be challenging year after year, which is why the IRS and Treasury have recently begun to offer an annual election for this issue. For taxpayers who choose to go this route, they can determine syndicate status based on information from the previous tax year; this can save taxpayers the time, hassle and money of running tedious calculations year after year.

For taxpayers who decide to make the election for any given tax year, the process is rather simple. Simply attach a statement to the original federal income tax return for the taxable year and submit it with the current year’s tax return. It is worth noting, however, that the election cannot be revoked once it has been made. With this in mind, business owners and taxpayers should be 100% certain that they wish to move forward with the election before filing their taxes for the year.

Time to Consult with a Professional?

Handling taxes as a small business owner can be overwhelming, even for “seasoned” business owners who have been doing this for years. That’s because tax laws are fluid and dynamic, always changing and evolving. Keeping up-to-date on the latest changes to small business exemptions, tax shelters and syndicate status can easily be a full-time job in itself. If you have any questions or would like additional information, contact us.

Related Insights

• 

  Why an S Corporation Might Be the Best Choice for Your Business

  Read More
• 

  Personal financial statement: A critical tool in securing your future

  Read More
• 

  IRS guidance coming regarding the IRA’s Clean Vehicle Credit

  Read More