Your goal in running your small business is some combination of:
- Having fun
- Being profitable
- Enjoying freedom
- Spending more of your time doing what you want to do
As a CPA, my job is to help you be more profitable so you can enjoy the other perks of your entrepreneurial experience. One way I help you be more profitable is to minimize your taxes with respect to your pre-tax results. One thing to keep in mind, economic activity is normally more important than the tax consequence. To make this clear, for every dollar you save in taxes, you typically have to spend two or three dollars. This means that the tax you saved still cost you one or two dollars after tax.
The first strategy to consider is the type of entity. In California, only sole proprietorships and general partnerships can operate with minimal government fees. Sooner or later, all other entity types, corporations, LLCs and Limited Partnerships involve an annual $800 minimum tax. And, the costs go up from there.
The primary strategies for tax planning are to:
- Shift income to lower tax bracket members of your family. For example, sole proprietors can employ their children who are under eighteen. As long as there is a legitimate service your children provide that is acceptable; and, you don’t have to pay social security taxes on their wages. If you are incorporated, the strategy still works, but all regular employment taxes apply.
- Deferring income to next year and accelerating expenses into this year. If you are a cash basis taxpayer and you think this year will be about as good as next year, you can delay sending out your December bills until January. Or, you can accelerate expenses such as supplies, and rent to that would normally be purchased next year into this year.
For a more detailed discussion of strategies that will work for you, you may contact me at 916-649-1040 or firstname.lastname@example.org.
Kenneth R. Cone, CPA