Business Tax Savings
Businesses are allowed to deduct anything that is "ordinary and necessary" for business under
Internal Revenue Code § 162. Individuals only have 5 deductions that they can take
(
see Individual Income Tax Savings Ideas).
Whatever the business owner, manager or president believes would be ordinary and necessary for the
business he/she can deduct for taxes. This is only limited by one's imagination as long as it can
fit the IRS' test of ordinary and necessary.
If you are going to start a business you have to decide what kind of entity to use: a partnership,
a
regular C corporation, a
S Corporation,
a
Limited Liability Company or
a Sole Proprietorship.
Each of these business entities has advantages and disadvantages.
If you are able, it is beneficial for you to select a state that has no state business income taxes.
There are a number of states that do not have business income taxes.
The state of Nevada is preferable for a number of reasons. Nevada is trying to be business friendly,
its corporate security laws are streamlined and it is trying to attract new business.
Nevada, does have one drawback, it is a difficult and time consuming to obtain a business license
there. California is one of the worst offenders for high taxes and over-regulations. For example,
California has corporate taxes that exceed 9% and that is on top of what you have to pay the
Internal Revenue Service. So before you decide what business entity to chose, if possible,
go with a state that has no taxation.
A Sole Proprietorship
is a business that is run and owned by one individual or a married couple. Taxes are filed on an IRS form
Schedule C. It is the simplest of all business entities. Whatever your business, you as the individual
are considered to be part of it and you are PERSONALLY liable for any debts it encounters.
The business could be a small one person operation or something substantially larger; employing hundreds
or even thousands of employees. The filing of forms and tax returns for the Sole Proprietorship are very
easy. However, whatever you have left after your deductions you will owe Social Security Taxes of 15.3%
(called "Self-employment Tax") in addition to your regular taxes up to a maximum cap. Other
business entities do not owe Social Securities on their net incomes. If you had a net income of
$70,000.00 from your Sole Proprietorship you would owe, in addition to your regular taxes,
$10,710.00 of Social Security taxes (Self-employment tax).
Disclaimer: The information in these web pages has been prepared as a
service to the community and does not constitute legal advice. This
information may not apply to your situation particularly if you do
not live in the state of California. Do not make legal decisions based
on this material. Consult an attorney in person before making any
important legal decision.
