General Tax Planning for Businesses and Individuals

(1) If you are a sole proprietor with gross receipts in excess of $100,000 per year, you are more susceptible to an IRS audit than an average taxpayer.  Consult a competent attorney to incorporate your practice. To inquire about our incorporation service, visit Corporate Attorney.

(2) Incorporating a business could protect its owners from liabilities provided that:

     (a) The entity is properly incorporated. Often, business owners use services of non-lawyers or lawyers without adequate knowledge of corporate law, to keep their costs down.  Unbeknownst to the owners, their corporations may never get incorporated properly. From time to time, they find out about the deficiencies in their corporations after being sued by someone or audited by the IRS. To inquire about our incorporation service, visit Corporate Attorney.

     (b) Comply with all necessary formalities, including reasonable capitalization. In addition to incorporation, each corporation must comply with the state law continuously, not just at the time of incorporation.

     (c) Consult a lawyer knowledgeable in your specific industry to ensure the corporation is compliant with the requirements. For example a professional medical corporation must comply with the state medical board regulations.

    (d) Business owners should think of their corporations as separate legal entities, and transactions between them and their corporations must be handled according to corporate law;

    (e) To prevent piercing the corporate veil, do not commingle. This means that if you do not separate your corporation from your personal accounts, the court may set aside the corporate shield and hold you personally responsible for the corporate debts. Therefore;

     (i) Do not pay your personal expenses from your corporation;

     (ii) Your loan to and loan from the corporation should be handled with legal formalities to comply with the state law and the IRS requirements;

     (iii) Have a business lawyer prepare necessary corporate minutes for all major business decisions.

       (iv) Make sure the corporation has reasonable capital.

       (v) Make sure the corporate capital is registered with an appropriate state agency such as your state department of corporations; 

       (vi) Make sure stock certificates are properly issued and recorded the corporate books.

(3) In purchasing a corporation or an LLC business:

     (a) Buy the assets rather than the corporation of the LLC, to avoid consequences of any pending lawsuits associated with the selling business, unless there is a valuable goodwill in the target practice. This method requires special IRS reporting at the year-end;

     (b) Have a thorough due diligence study done by a lawyer or CPA experienced in the industry before the purchase;

     (c) Seek legal advice from a business lawyer on drafting the purchase contract; and,

     (d) Consult a tax lawyer for a tax-advantageous allocation of the purchase price among various assets on the escrow papers. It is important to note that this has far-reaching tax effect on your practice.

(4) For income tax purposes, consider an S corporation, which does not pay income tax to the IRS, and its California income tax is the greater of $800 or 1.5% of the annual net income.

(5) If you are working in your S corporation, be sure to take reasonable payroll from the corporation;

(6) Make sure your corporate payroll taxes are paid timely to avoid potential personal liability by your state and the IRS.

(7) For tax planning purposes in an S corporation, the net income is divided into the owner’s salary and K-1 distribution. Paying unreasonably low salary to S corporation shareholders has been a major IRS audit trigger in the recent years. Although, there is no rule of thumb formula for determining “reasonable salary” for the owners, such determination is made by your tax advisor using case laws, your specialty and experience, the net income and other pertinent facts and circumstances.

(8) The IRS has claimed that some business owners have not paid themselves reasonable salaries in an S corporation. Conversely, they have argued that the owners of C corporations have paid themselves excessive compensation. Each argument may have its own merits and important tax consequences;

(9) Considering the new flat 21% C corporation taxes, seek advice of CPAs or tax lawyers whether it may be more tax advantageous to have a C corporation instead of an S corporation ;

(10) Have your payroll done by your tax preparer CPA firm so that they monitor the reasonableness of your compensation  throughout the year and provide you with year-round tax planning advice;

(11) Do not classify people who are working for you as independent contractors without discussing it with your tax attorney or CPA. This misclassification has subjected many business owners to the IRS and EDD audits, and resulted in substantial taxes, penalties and legal fees;

(12) During employment tax audits, auditors may extend their audits up to three or even ten (EDD does this) previous years. There are numerous statutory determinant factors by which the courts determine proper classification of someone working for you as an independent contractor or an employee. There are twenty requirements by the IRS and twenty two requirements by California to make such determination. There are 4-5 major factors used by auditors in conducting their tax audit;

(13) Use services of experienced CPAs in particular industry in preparing your accounting report and tax returns. For tax preparation visit Tax CPA. Based on our experience in representing businesses before the IRS, FTB, EDD, etc. lack of this factor has been a major audit trigger. A professionally trained CPA could ensure proper preparation of the underlying financial statements, detects,  and mitigates or eliminates many tax audit triggers, and prevents audit;

(14) Many audited businesses use services of low quality advisors because of their low fee or free service. Ironically, most the time, it is the very low quality work of those advisors that have caused the audit.

(15) For tax audit representation, do not retain the same individual who prepared your tax returns. Because there is an apparent conflict of interest here. The preparer may be more concerned about defending himself or herself than you;

(16) Retain competent lawyers and CPAs for professional services. Always remember the famous British saying; “I am not rich enough to afford cheap service”. Most the time, these cheap services end up being costly; and,

(17) For a tax audit representation, consider hiring a top tax attorney because:

     (a) Attorney-Client Privilege prevents the IRS from subpoenaing an attorney;

     (b) Attorneys are well trained to defend clients before the IRS or in tax court; 

     (c) If the audit turns into criminal, non-lawyer tax advisors may be ordered to testify against you; and,

    (d) For IRS Defense Attorney visit Tax Defense Attorney

(18) Visit our Website for New Tax Law

(19) Visit our Website for New 20% Deduction for Pass-Throughs

(20) It would be cost effective to seek legal advice on all business and tax matters. Visit our Website for General Counsel Services