Protect your tax savings with these 3 helpful ways

We are all aware that one of the most effective ways to manage your tax rate and build wealth is to have some type of business entity created.  This is because once your create a business entity the way the government treats you tax wise is completely different.  It’s important to remember that the entity status and structure helps keep a clear line between your tax liability and those of your business.  Wealthability is a resource available to you that helps you learn the ins and outs of tax strategy and builds upon the 3 helpful tax saving strategies listed below.

3 Tax Saving Strategies for Your Business Entity

• 1 Have your entity deal directly with its vendors
  • Take a look at the expenses your entity has. You may find expenses like telephone, utilities, supplies, insurance, rent, taxes, legal, vehicle, management fees or wages to name a few. With most expenses, there is usually a written agreement with the vendor. For example, with a telephone, there is a written agreement with the telephone provider. Review your expenses and determine if there is a written agreement with the vendor. If there is, review the agreement to determine if it is with your entity. What you may find is that some of the agreements are not in your entity’s name but rather in your personal name. Some agreements you may be able to transfer into your entity’s name without any hassle. Other agreements may be a little more challenging. Of course, before making any changes to written agreements, you’ll want to discuss the non-tax implications with your vendor and / or attorney. From a tax standpoint, it’s important to be able to show that the entity is responsible for the expense and the entity is the one receiving the goods and services. A written agreement between the vendor and the entity is the easy way to do this. But, as I mentioned, sometimes this can be a little challenging so what do you do in those cases where you cannot easily have the agreement be directly between your entity and the vendor? One option is to document the arrangement you have with your entity as to why you entered into the agreement instead of your entity. You’ll want to document the entity’s responsibilities and your responsibilities so it is clear that the entity is responsible for the expense. You’ll also want to document why this arrangement is necessary from a business standpoint.
• 2 Have your entity deal directly with its customers
  • Just as an entity should deal directly with its vendors, it should also deal directly with its customers. A simple example of this is an entity that owns rental property. The rent check should go directly to the entity. If the entity has a property manager, then the rent check should go to the property manager and the property management agreement should be with the entity. If income is collected in your individual name and not in your entity’s name, it opens the door for the government to make a case that the income is yours and not your entity’s. Review the income your entity has collected recently and make sure it is coming directly from the customer.
• 3 Title your entity’s assets to the entity
  • Review your entity’s balance sheet. In the assets section, common assets include bank accounts, investment accounts and other investments, such as property. Most assets have some form of documented ownership. For example, to open a bank account, paperwork is filled out that indicates the owner’s name. Review the forms for the assets you see on your entity’s balance sheet to verify your entity is the named owner. You may find that some assets are not in your entity’s name. In these cases, assess the non-tax implications of changing the ownership to your entity. You’ll want to discuss this with your attorney before making any changes. If you find that there are non-tax implications that prevent ownership to be in the entity’s name, then it will be very important to document why the entity is considered the owner for tax purposes. Without this documentation, the asset and income and expenses related to the asset could be treated as if the entity does not own them.

The Details of Your Business Entity and Tax Structure Matter

The government is can be a cumbersome machine sometimes and can be frightening to business owners. We all know the cost of owning a business and running a business and the risks involved with investing in assets. Keeping that clear line between you and your entity is important and the details matter so you can prove to the government that your tax strategy is on the up and up and you retain your investment income and tax savings.  The details are what provide the best support that the entity and owner are indeed separate.

Blog