Any company worth its salt knows that a tax manager’s job can be one of the most crucial positions. A competent tax professional who knows their way in and out of tax regulations can bring their company millions of dollars in savings. But, before proceeding any further, we want to clarify that we’re talking about tax savings through legitimate means. This is markedly different from tax evasion, a deliberate attempt to conceal taxable income or underpay the government. The latter is illegal and is punishable by law.
Now that that’s out of the way, let’s get back to tax management. Proper tax management can help a company find deductions and credits to keep it from paying more than what’s necessary while, at the same time, still complying with legal obligations and requirements. A tax professional constantly has to be on his toes to ensure that they are doing everything legal and within their powers to minimize their company’s tax burdens. If you are one such professional, here are some tips that can further boost your tax mitigation strategies for your business or corporation.
Tax Tips To Consider
1.Be strategic about your choice of entity
Your type of business entity will have a substantial impact on what taxes you will be obliged to pay as well as the tax benefits you can enjoy. In the United States, there are six types of entities to choose from: sole proprietorship, general partnership, limited partnership, limited liability company or LLC, C corporation, and an S corporation.
Now is a good time as any to evaluate your business. To assess what business entity you should be registered as, determine the level of risk to your personal assets, the tax advantages of each type of entity, how attractive it will be to future investors and owners, and the costs associated with the maintenance of such an entity. In general, the default entity which is said to be best for tax purposes is the limited liability corporation or LLC. Because the Internal Revenue Service or IRS considers LLCs as “pass-through” entities (taxes are paid through personal tax codes instead of corporate tax codes), LLCs don’t have to pay federal income taxes. This means they can avoid double taxation.
On the other hand, being a C company also has tax advantages. It is actually the only kind of entity where you can consider contributions (which shouldn’t be more than 10% of taxable income in any given year) made out to qualified charities as business expenses. Therefore, these can be classified as tax deductions, allowing you more savings in the process.
Carefully weigh each business entity’s pros and cons to determine which one best matches your needs and goals.
2. Defer payouts with a NIMCRUT
First off, let’s get to what a “charitable remainder unitrust” or CRUT means before advancing to Net Income with Make-up Charitable Remainder Unitrust or NIMCRUT.
A CRUT is a gift of cash or property given to an irrevocable trust. Here, beneficiaries of a non-charitable nature receive payouts at least every year for the duration of their lives or for a set period. This is typically equivalent to a percentage of a trust’s market value or income.
At the end of the period, the remainder of the trust is given to a charitable institution. CRUTS are intended to incentivize charitable donations through substantial tax benefits: tax deferral and income smoothing (lowering taxes by leveling out fluctuation periods in net income from different reporting periods).
A NIMCRUT is a kind of CRUT. But, unlike a standard CRUT which gives out a fixed percentage every year, a NIMCRUT limits the distribution of the payouts to the non-charitable beneficiaries.
In short, only the net income is distributed, unlike in a typical CRUT where a percentage is paid out from the net income and then from the principal.
Because you only take a limited amount out of a NIMCRUT, the principal can accumulate in the trust. This provides more money to gain more income-generating opportunities for the trust. You can also choose to defer withdrawing your NIMCRUT payouts each year. This means that your money stays to accumulate further and potentially generate more tax-free income for as long as it is kept in the trust.
3. Use New Tax Rules to Your Advantage
During the Covid19 pandemic, several rules on taxation were modified. If you keep yourself updated with these developments, you can legally save yourself a great deal of money in taxes.
For example, it used to be that companies could deduct 50% of meals that were categorized as business expenses while also making the typical tax deductions of operating a business.
However, the Taxpayer Certainty and Disaster Relief Act of 2020 has increased this to a 100% deduction on all business-related food and beverage expenses for 2021 and 2022. Although this is only a temporary adjustment and there are conditions attached to the full deduction, such as having to have the cost classified as “ordinary and necessary” or “not lavish,” a significant amount can evidently still be saved by business owners. For more details, check out IRS Notice 2021-25.