Do you own or operate an LLC?
Good move legally but it may cost you at tax time!

Let me explain…

Did you know that an LLC is not recognized by the IRS?

An LLC is a state created entity and as such is a disregarded entity by the IRS.  The IRS only recognizes Sole Proprietorships, Partnerships, S Corporations and C Corporations.

Once you’ve setup your LLC, you’re not done yet.  In addition to creating your Operating Agreement, you have to choose how you want to be taxed.

Consider this…..most single member LLC’s will file a Schedule C Sole Proprietor Profit and Loss form.  This is all well and good if you believe you will be losing money for the first few years.  However, if you are going to be making money, you’ve just created a heavy tax burden for yourself.  Here’s why…

Even if you have enough personal deductions and end up not owing Federal or State income taxes, you can’t get around the Self-Employment Tax.  This is the business owners’ version of Social Security taxes.  As long as there is taxable income, there is Self-Employment taxes.  The Self-Employment tax rate is 15.3%

For example, suppose your net business income is $30,000.  You will owe, in addition to any Federal and State taxes, $4,590 in self-employment taxes.

Okay, I hear you saying..”I’ll just write-off all my income”

Well, can you “legally”?  Are you willing to risk an audit?  And if you can write it all off and if you do so year after year, the IRS may consider you are operating a “hobby” and disallow any deductions that are more than your earnings.

Now I hear you saying..”Well, James, what do you suggest?”

That’s a good question.  Let me ask you one before I answer.

When you rather know you have a tax problem?  Before January 1st when you might be able to fix it or after December 31st when it’s too late.  The correct answer is “before January 1st”.   And the key to all of this is …….(drumroll, please)….TAX PLANNING.

You know the old adage- “Most people don’t plan to fail.  They just fail to plan.”

It’s the same with your business and your taxes.  Most owners don’t think about taxes again until it’s time to gather their receipts or it’s time to file.  And in most cases they’ve missed an opportunity to reduce their tax burden.

Don't Let It Get Away!

The best any tax preparer can do is know the code and take your receipts and get the income and deductions in the proper place based on what you did during the year.

Through Tax Planning you can get ahead of the IRS and use the immense tax code to your advantage..but you must do your planning during the tax year and not when your returns are being prepared.

I’ve identified at least 4 tax mistakes that most business owners make.  I’m willing to share these with you if you will share this with other business owners.  Forward this link and help save some other owners.  Deal?

Next week, I’ll share with you how the IRS laws can help you pay a portion of your child’s college tuition or private school tution through a legal business deduction. You’ll be surprised how easy it is when done right.

As usual, if I can help you keep more of what you make, give me a call at 240-356-5050.

To Your Financial Health!