December 6th, 2011
Posted by our partner RocketLawyer, by Jenny Greenhough
The shiny ball is going to drop…whether you’re ready or not. And with the holiday season in full swing, it’s easy to procrastinate thinking about your business. Rookie mistake! Year-end is the ideal time to make sure you’re doing everything you can to maximize your tax savings before 2012 comes to a close, and to start developing your tax strategy for the new year. We know you’re busy, so we put together 5 tax tips to help you wind down 2011 and get the most tax-benefits in 2012.
1. Incorporate your small business on January 1.
It’s always a good time to incorporate because of potential tax savings and liability protection, but the New Year may be the best time. With a filing date of January 1, you’ll save time when filing a tax return for that year, because the business doesn’t need to file two separate tax returns for the unincorporated entity and one for the new C-Corp, S-Corp, or LLC. You can incorporate your business for free at Rocket Lawyer.
2. Consider both tax savings and liability protection when choosing your business structure.
If you want to incorporate on January 1, start thinking about your business structure now. There are multiple factors to consider when choosing between a C-Corp, S-Corp, or an LLC, and while many business owners decide to incorporate based on potential tax savings alone, it’s also important to consider liability protection. Make sure you speak to an attorney, and not just a CPA - you may find that opinions differ depending on who you talk to. With all the facts you’ll be better equipped to make the right decision for your business and reap the benefits all year long. With a Rocket Lawyer legal plan, you can get a free consultation with a Rocket Lawyer On Call attorney in your area.
3. Be aware of the personal liabilities incurred by individuals you choose to place in positions of authority.
The issue of tax fund recovery penalties is a little-known danger to your business and employees. If your business has failed to pay what it owes to the IRS, this money is held by you, in trust, for the government. In fact, the government will hold any and all parties in positions of authority within the business personally liable and accountable for the repayment of the funds.
Individuals in positions of responsibility, whether it is the business owner, or the signatory, are personally liable for both the unpaid taxes, and the penalties associated with non-payment. So, before you decide to put your children, spouse, or other employees in these positions in your company, make sure you understand the unintended consequences that may arise as a result of this action.
“Choosing signatories wisely can save your business and your family from any unnecessary interaction with the IRS,” emphasized tax attorney James Pratt.
“Most people would like their children to take over the family business, but they should balance their education in the business with protecting them from some of the liabilities,” added Pratt.
4. Before you hire a new worker, choose carefully between classifying the individual as an employee or an independent contractor to avoid an audit.
Worker classification (employee vs independent contractor) will be a hot topic for the IRS this coming year. Companies sometimes try to have it both ways - sending a big red flag to the IRS. A common situation is when a company treats employees as independent contractors in practice (not paying payroll taxes on the workers), but then also claims tax deductions as if the workers were employees.
To prevent this situation, think about the role you want the new worker to fulfill and then put the appropriate relationship in writing with an Independent Contractor Agreement or an Employment Agreement. Then, stick with it, from paying payroll taxes (if applicable) through to the tax credits you claim. Also, it’s best to look at the long term tax consequences of worker classification from the outset, and an attorney’s advice can be extremely helpful for getting the tax savings you deserve while staying in the good grace of the IRS.
5. Keep track of your expenditures over the next year and prepare for rising costs as itemized tax deductions are reduced.
The Joint Taxation Committee has recommended cuts to charitable deductions, mortgage interest deductions and state and local tax deductions. The likely effect of this is higher costs for business and a significant fall-out for the mortgage real-estate and non-profit sector. This, of all years, is one where planning ahead will be crucial.