Tax Relief Strategy-Proper Entity Structuring

Let's check the tax relief advantages of incorporating your home-based business. The law is clear about operating a home-based business under Revenue Ruling 95. There was a landmark case referred to as the Solomon ruling. It's based on where you do the work and where you get paid. A good example would be a plumber operating out of his home. If he gets a call from a guy that his sink is all stopped up, he can't tell the guy to bring his sink over to his place. He has to go out to perform the work and to get paid. So under that revenue ruling that would not be considered a home-based operation because he is not doing the work out of his own home. Senate Bill #337 makes it easier for you to be able to take tax relief deductions if you’re operating your business out of your home. The key is where do you do the work and where do you get paid? And it applies whether you're operating your business as a corporation or as a sole proprietor. If you incorporate your home-based business, you can deduct everything from home repairs, home insurance, health insurance, travel expenses; your own retirement plans and as a result of this lowers your income taxes dramatically. You can legally deduct meals and clothing under certain conditions, deduct automobile insurance, set up a deductible college fund, and deduct your heat, phone and other utilities under certain conditions. Diane Kennedy, CPA, states, "If you're doing this as an individual and not as a business owner, you're running up a bright red flag to the IRS. You can live a much richer life when you make your home your financial command post." There are literally hundreds of ways you can save on taxes legally by incorporating your home-based business. The write-offs are many and substantial. By turning your home into a business corporation you can completely reverse the old way of looking at it. You can stop viewing your home as an endless money pit and start seeing it as a Financial Command Post, the center of your dreams by building lasting wealth. The question you have to ask yourself is, are you creating a red flag by operating the way you are or are you going to create the vehicle that allows you to do these things and let the government and the IRS help you do it legally and successfully.

'C' Corporations vs. 'S' Corporations

What is the difference between an 'S' and a 'C' corporation? All corporations begin as 'C' corporations. The 'S' corporation is a 'C' corporation that has applied for the 'S' election through the IRS. Unlike a sole proprietorship, the 'S' corporation is a separate legal entity for business liability purposes. However, the profits and losses of the 'S' corporation flow through to its shareholders personally, just like in a partnership. The shareholders then must pay taxes at their individual rate. Also, an 'S' corporation cannot retain earnings, and can have no more than (35) shareholders assigned. There are some restrictions that preclude every business from filing for an 'S' election. The fact that income flows through to the individual shareholders is advantageous if there are corporate losses that could help the shareholders reduce personal tax liabilities. Also, 'S' corporations must have a year-end of December 31st for tax purposes. Most of the advantages of the 'S' election were lost with the Tax Reform Act of 1986. They do serve to shield their owners from personal liability. However, with few exceptions, the 'S' corporation is no longer advantageous to most profitable businesses. 'C' corporations are similar to 'S' corporations in many ways. They are a separate legal entity, and, therefore, recieve liability protection. They have shareholders, though the number and type of shareholders are not limited. However, there are several significant differences that we can take advantage of in our tax planning. First, 'C' corporations can retain earnings. Also, they can elect a tax year-end other than December 31st. Lastly, 'C' corporations are taxed at the corporate rate. For more detailed information about business tax relief deductions and other corporate tax relief strategies such as up-streaming income, you should purchase our audio programs "Incorporating Brilliance" and "Converting Your Ten Largest Personal Expenses (to Deductible business expenses)".

Limited Partnerships

Limited partnerships were designed as the vehicle for businesses where ownership and management are separate. As such, they are great vehicles for real estate investments as well as other businesses. For example, imagine that you intend to purchase an apartment building. You intend to manage it yourself, and you are seeking investors who will finance the project. An L.P. can be the perfect form of business. General Partners and Limited Partners: You as the general partner have the responsibility of day to day management of the L.P. Because you have the control, you also have sole responsibility for any liability that arises from L.P. operations. So, you may want to set up a corporation to act as the General Partner. The limited partners in a limited partnership are passive investors. As such, they are insulated from any liability from business operations. The only thing at risk is their investment in the L.P. Limited Partnerships and Asset protection While corporations provide a measure of asset protection by separating your personal assets from your business, Limited Partnerships take that concept to the next level. This is done through a mechanism called a charging order. Simply put, a charging order is the result of a creditor obtaining a judgment against a Limited Partnership. Lets contrast the charging order with a regular judgment: a) A regular judgment gives the creditor the right to seize the assets of the corporation. A charging order does not give the creditor any rights to the assets of the limited partnership. b) A regular judgment can result in seizing the stock of a company, thereby giving the creditor voting rights (control) over those assets. A charging order provides the holder with no voting rights or control. c) A regular judgment also gives the holder access to the profit generated by the company. A charging order ONLY give the holder access to the distributed profits of the company (note: one of the tools you can use to combat a charging order against your L.P. is to never distribute the profits of your L.P. Notice I didn't say your L.P. can't be profitable. I said you may not want to distribute any funds as profits.) d) A regular judgment results in an income tax obligation to the creditor if, and only if, he collects on that judgment. A charging order creates an income tax obligation on the creditor so long as there is a profit, even if that profit is not distributed to the partners. The net result, you can put a creditor in a position where he has no control, no power and owes income taxes on money that was never distributed to him. And that's if he even wins the lawsuit in the first place! This is what give rise to the enormous deterrent power of the Charging Order. And isn't it far better to avoid a lawsuit altogether then to just win one?

The Limited Liability Company (LLC)

About 25 years ago, the powers that be (read that "Rich people") decided that they wanted all the tax relief benefits of 'S' corporations and 'C' corporations with the power of the charging order, corporate simplicity and the ability to have a single person entity with no partners. In other words, they wanted the best of all possible entity worlds. Enter the Limited Liability Company (LLC) LLC's require only one person (member). There is no need for a general partner and a limited partner(s). LLC's require far fewer corporate formalities. The protection of "S' and 'C' corporations can be lost (i.e. piercing the corporate veil) merely because you failed to dot your corporate "i's" and cross your corporate "t's". They have the enormous asset protection and lawsuit deterrent power of the charging order. And, although LLC's were initially taxed as partnerships, they now have the flexibility to be taxed as partnerships, 'S' corporations or 'C' corporations. For this reason, the use of LLC's is become much more prevalent. Shouldn't you have an LLC somewhere in your entity structure/financial foundation? The over-riding points for you to take away from this is that to get ahead on the lasting wealth accumulation curve, you must have your own business and you must set it up in the proper entity structure. Sincerely, Drew Miles, The Tax Saving Attorney