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TAX STRATEGY
BY JOHN SAVIGNANO, CPA
Stategy 1
Entity Structuring
The choice of the best business entity
for your needs is important and complex.
We have seen many business owners,
even with the advice of counsel,
make the wrong decision, or make no
decision at all, by operating as a sole proprietorship
or general partnership. This
can have devastating consequences both
from a tax and an asset protection perspective.
We have heard tax professionals
counsel their clients to wait a few years
before setting up a corporation in order
to save the extra costs of filing a corporate
return. Or they recommend “keeping
it simple” with an “S” Corporation,
ignorant of the insufficient protection
this structure provides.
Here’s a lesson from the school of hard
knocks-all it takes is one lawsuit gone
bad, and the small cost of setting up the
right structure will pale in comparison
to the damage you incur. A single judgement
could cost you millions of dollars
and follow you for the rest of your life.
It is better to avoid a lawsuit altogether
than to win after a protracted and costly
legal battle.
There are powerful strategies to limit
your risk and actually deter lawsuits.
There is no need for risky offshore trusts
and international business corporations
which have come under scrutiny by the
IRS and Federal Government.
LLCs and Limited Partnerships come
with the built-in benefit of the charging
order. This can create an enormous asset
protection advantage for you at no additional
cost. Yet few, if any, tax or legal
professionals fully understand these
entities, so they leave you unnecessarily
exposed. Properly utilized, the charging
order can prevent creditors from seizing
your assets.
Then there are the tax benefits. For
most people, tax planning ends on
December 31st of each year. That’s
because December 31st is the default year
end for most businesses, corporations
and sole proprietorships alike. With the
proper structure, you can shift income
from one tax year to another-even to a
place with more favorable tax rates.
How It Works In Practice
Most people take the profit from their
business at the end of the year either as
a bonus or in dividends. This is done
to save the FICA tax. If you just leave
the money in the business at the end of
the year, Uncle Sam still taxes it-either
at your individual rate or at the corporate
rates.
But, if you have two entities, each can
have a different year end. For example,
you could have an “S” Corporation
with a December 31st year end and a
“C” Corporation with a June 30th year
end. The “S” Corporation might be your
core business and the “C” Corporation
is established to do your sales, marketing
or management. The first step of
income shifting, “upstreaming,” reduces
the taxable income in your core business.
The second step is to expense off as
much of this income from your management
company as possible, using more
of the 400 deductions contained in the
Tax Code-we are focusing on only a few
of these strategies in this report. This can
effectively reduce your tax base to a fraction
of what it would be otherwise.
John Savignano is a partner with
Savignano Accountants & Advisors located
at 47-46 Vernon Blvd., Second Floor, in
Long Island City. If you have any questions
or require additional information, please call
John at 718-707-0955.
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718-707-0295
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