Before moving full steam ahead into tax season, it's important to understand how your company's legal structure can impact your taxes. Guidelines vary significantly, but here are a few to get you thinking. Visit IRS.gov for details related to your business structure or discuss with your accountant--they should have this under control. For more information on tax prep best practices, download our End-of-Year Tax Guide and Checklist.
Tax implications for LLCs or LPs
- LLCs that do not elect to be taxed as an S-Corp are pass-through entities; as a result, business profits and losses are run through personal tax returns.
- Business expenses, including investments in fixed assets, are still important considerations as a means of reducing tax liability.
- Be sure to consult your current payroll method with your tax accountant to make sure you’re paying yourself in the most beneficial way for your personal taxes.
Tax implications for S Corporations (S Corp)
- All S Corp income flows through to owners who are then taxed on an individual level.
- The owner of an S Corp has tax-advantaged retirement plans available without the
restrictions of a traditional individual retirement account.
- S Corp owners can establish a Safe Harbor 401(k) plan and to make tax-deferred
contributions of up to $16,500 ($21,500 if over age 50) to their account each year; this does not include the corporation’s matching contributions.
- If medical care coverage has been established by the S Corp, a 2% shareholderemployee is eligible for an above-the-line deduction in arriving at Adjusted Gross Income (AGI) for amounts paid during the year for medical care premiums. An S Corp with multiple shareholders must confirm that all distributions are equal based on ownership percentages.
- Who can elect to be taxed as an S-Corp? Learn more here.
Tax implications for C Corporations (C Corp)
- C Corps are not pass-through entities; therefore, federal and state taxes are based on year-end net income.
- Owner salaries should be run through payroll processing (instead of being drawn by or distributed to the owner) and are an expense to the business.
- If year-end bonuses are used to reduce the business’s net income, funds should be issued as a paycheck; as a result, payroll taxes will apply and year-end tax adjustments will be necessary.
The following Paro freelancers contributed to this article and to our End-of-year Tax Guide whitepaper:
Philip Wong has nearly 30 years of experience in Payroll Management and Payroll Tax and Compliance. He has worked in the public, private, and non-profit sectors, and his experience extends to small companies and startups. Philip holds an MBA and undergraduate degrees in Accounting and Finance. He is a native of Boston, Massachusetts, where he currently practices.
Shaan Afridi has five years of accounting experience, with a focus on business and individual income tax return preparation. He is a CPA certified by the State of California and a chartered accountant certified by the province of British Columbia, Canada. Shaan earned his degree from San Jose State University.
Ross Sumner a CPA in the state of Virginia with more than five years of experience in tax and accounting. In addition to supporting Paro’s clients in the professional services and real estate industries, he currently works for a small firm in Midlothian, Virginia. Prior to that, he spent two years at RSM (formerly McGladrey), so he has helped individuals and en tities of all sizes and needs in a short amount of time.