Not Quite a Scam: How Businesses Lose Money on Tax Planning Strategies for Corporations
There’s no shortage of opinions on how businesses can avoid paying taxes. From social media influencers to your neighbor down the street, plenty of people are willing to put in their two cents about how you can take advantage of tax laws.
Unfortunately, the quality of tax advice varies from oversimplified to impractical or just plain illegal. To make matters worse, even if their suggestion is legitimate, they can’t tell you how to do it or, more importantly, how NOT to do it. And, of course, they won’t be there to defend you when it goes wrong.
A Little Knowledge About Corporate Tax Planning Strategy Is a Dangerous Thing
You may have heard something on social media similar to “There’s a thing called the Augusta Rule! Use it to rent out your house tax-free!” Many corporations heard the message and jumped on board, some netting thousands in tax-free income. Today, cases of Augusta Rule violations show how misplaced trust can backfire—and how proper documentation can save business owners a lot of time, penalties, and heartache.
Of course, the potential for costly audits reaches far beyond niche deductions like the Augusta Rule. Pitfalls abound in the wide world of asset protection, with accountants and attorneys occasionally facing charges for attempting to defraud creditors or refusing access to foreign bank accounts.
Bottom line: There are many different ways to achieve certain goals, but not all are legal or above board. Placing your trust in the wrong hands could create a corporate tax planning strategy based on half facts, half guesses—and no way to tell which is which. Find someone who will show you the math!
How to Build Corporate Tax Planning Strategies That Stand Up in Court
Any corporate strategy based solely on avoiding taxes is a bad idea. Yes, there are ways to reduce your tax burden, but not paying taxes when you owe them will ultimately get you into trouble. That said, you only need to pay as much tax as you owe.
Take a recent client, for example. I was retained to reorganize and restructure the client’s company, a software consultancy. There wasn’t much income when the business first started, so it was set up as an LLC to also hold money from my client’s own investments.
Years after the formation of the company, my client developed a proprietary decision making algorithm (early AI) strategy that she licenses to agriculture producers. Proceeds from the licensing of her intellectual property have made a significant sum, all of which is held in the LLC. However, everything coming into the company is counted as self-employment income, subjecting my client to a 15% self-employment tax.
I immediately asked her why she hadn’t converted the business into an S-corporation, something her accountant definitely should have recommended long before now. After examining their taxes and doing some research, I estimated that classification as an S-corp could save my client tens of thousands of dollars. I then asked the client if I could send it to an accountant colleague to confirm my assessment. She consented, and my colleague agreed that it would be the right move for my client.
[Side note: People who admit that they don’t know everything are demonstrating professional honesty. A professional who says “I don’t know” is better than one who won’t acknowledge their limits—or worse, fails to disclose them.]The client is now on a conversion to an S-corp. Her corporate tax savings are more than enough to cover all of the business’s origination fees, document filing, and attorney costs. While she regrets that she resisted the idea of an S-corp for so long, she will now save money with every passing year after working with me.
An Attorney Can Save You Money Now and Defend Your Corporate Tax Planning Strategy in the Future
When corporate clients are looking for help with business matters, they often ask one question right away: how much do I have to pay? A much better question is, will I get what I pay for? Because no matter who you choose, the answer is always yes.
A good attorney can deliver what you ask for, but also knows the questions you should be asking. There are ways to save money—multiple percentage points of ROI—that many owners and shareholders don’t even know exist. If you can get a return on something you’re already doing, why wouldn’t that be at the top of your list instead of the bottom?
At Yolofsky Law, we do the work to make sure your corporate deductions are legitimate and won’t cause you legal problems down the road. Email us at hello@yolofskylaw.com today or schedule a 15-minute call to see how we can help protect your company now and in the future.