Living The Corporate Lifestyle

There are many benefits to setting up a corporation or LLC. Depending on your business or investments, you may be allowed to take advantage of some benefits, but not others. I’ve had countless clients over the years form LLCs or corporations, but they were never given any guidance on what to do, or how to take advantage of their benefits. Asset protection, the ability to build business credit, estate planning/business continuation, and tremendous tax savings are the main benefits of Living the Corporate Lifestyle.

I want to focus today on the tax benefits for Active Income Producing Businesses. You see, the IRS has certain rules for active income, versus passive income and passive expenses. Active income is any form of income you make from “working” for the money.  Independent contractors, self-employed individuals, operating short-term rentals, or selling a product or service. Any activity that is deemed “Active Income” is subject to State, Federal, and Self Employment Tax appropriately. Our government has carved out special tax incentives/benefits to encourage capitalism. It is your right to take advantage of these benefits. 

If you have an Active Income Producing Business, which could be just about any type of business activity, you should be tracking all your expenses and keeping them organized monthly. Your goal is usually to pay the least amount in tax as possible. So, you put a system in place to track all your expenses to write off against your other income. Home Office (Office Expense), utilities, cell phone, cable TV or satellite, meals, travel, equipment, mileage or cost of a business vehicle, training, supplies, marketing, annual board meetings in Hawaii, etc. Many new businesses don’t make much money in the first couple of years in business, they generate losses, which offsets other income. 

The problem I see most often is people form an LLC for their business, but they don’t make the proper tax election. All these things above can be written off in a single-member LLC (sole proprietor), however, these expenses must be itemized on Schedule C of your personal return. You have the highest risk of being audited when filing Schedule C. Most everyone I have ever consulted who has been audited, has always filed Schedule C.

By forming an S-Corp, or LLC taxed as an S-Corp, you significantly reduce your audit risk. You still can write all these things off under a corporate return, eliminating Schedule C. Additionally, the LLC can pay a reasonable salary (w-2 check) and a K-1 distribution. Following these rules can also save you thousands of dollars in Self-Employment Tax (Social Security and Medicare tax). 

I hear tax professionals tell their clients, “You don’t make enough money to be taxed as an S-Corp.” This morning, I spoke with a client whose CPA told her she was not allowed to make an S-election; completely false. My argument is always, “It’s probably even more important to make the S-election just to reduce your audit risk!” Very few experienced tax pros would ever argue differently.

If you are starting a business or have a business with active income and active expenses, get your LLC formed immediately. If you have an existing LLC and have not made the S-election, talk with your tax professional about making the S-election. It takes less than 5 minutes, significantly reduces your audit risk, and as you start making money, can save you thousands of dollars in Social Security and Medicare tax. Until you start making money, you’ll at least be able to write off expenses with significantly lower audit risk.

With NCH, the state’s top business formation service, you can register your LLC in Nevada quickly and easily. Our specialists will help you choose the right entity for your company and understand why an LLC in Nevada is your best option. We’ll assist you with all necessary Nevada LLC forms, including the vital Articles of Organization, and help you comply with state regulations. In addition, we offer expert assistance with tax compliance, credit building, and payroll management. Schedule a private consultation to explore effective solutions to minimize tax liabilities and protect your wealth. Start unleashing your LLC’s full potential today with NCH. Schedule a consultation with Adam Kintigh today!

DISCLAIMER: The above material has been prepared for informational purposes only, containing opinions of the provider, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Please consider consulting tax, legal, and accounting advisors before engaging in any transaction.