April 11, 2022

Tax Tips to Help Minimize Your 2022 Tax Burden

All businesses, whether large or small, should frequently evaluate strategies for minimizing their overall tax burden. Here are a few tips that businesses may consider implementing to achieve such tax savings.

Choice of Entity

Determining the type of legal entity used to operate a business is a crucial decision with significant tax and other legal implications that every business owner should regularly consider. For tax purposes, an entity may either be taxed as a “pass-through entity” or a C corporation. A pass-through entity is a business structure where no tax is imposed at the entity level. Rather, the income/loss of the business is reported directly on the owner’s tax return. A sole proprietorship, partnership and S corporation are all examples of pass-through entities.

On the other hand, a C corporation is taxed directly on its earnings and the owners are subject to additional tax upon receiving dividends from the C corporation. This second level of tax is often referred to as “double taxation.” The Tax Cuts and Jobs Act of 2017 (TCJA) reduced the income tax rate for C corporations from a top progressive rate of 35% to a flat 21% rate and individuals are subject to a top rate of 37%.

Although the tax rate imposed on C corporations is generally lower than the highest individual tax rate, it is important to keep in mind that shareholders will bear an additional burden of tax on dividend paid by C corporations. Dividends are taxed at a maximum rate of 20% but may be subject to an additional 3.8% net investment income tax. After considering the double tax imposed, the tax burden or C corporations and its shareholders is 39.8%. Thus, if a business owner expects to receive frequent distributions of earnings from the business, then operating as a C corporation will likely result in a higher overall tax burden than if he business were structured as a pass-through entity. Businesses should work closely with their tax and legal advisors to continuously evaluate choice-of-entity considerations.

Read the complete article in March/April 2020 issue of Corp! Magazine on page 44.

About the author:

Headshot of Cody Attisha of Kerr RusellCody Attisha focuses on taxation law, corporate law, mergers and acquisitions, finance, and estate and trust planning. He also helps clients with entity formation, including evaluating, choosing, and implementing the right partnership, corporate, or non-profit structure.

 

Shaun Graff

Shaun T. Graff is a corporate attorney who focuses his practice on tax, mergers and acquisitions, and general corporate matters. He assists clients with all manner of corporate transactions, including the purchase and sale of assets, stock and entire companies.

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