Academic journal article Journal of Accountancy

Ten Tax Tips for the Small Business; Here Are the Tax Planing Areas That Will Be Important in 1990

Academic journal article Journal of Accountancy

Ten Tax Tips for the Small Business; Here Are the Tax Planing Areas That Will Be Important in 1990

Article excerpt


Here are the tax planning areas that will be important in 1990.

Tax practitioners often are asked two tough questions by the small business owner: What's left for tax planning? What tax strategies should I be looking at for my business?

Often these questions are raised with the expectation that tax incentives, shelters and gimmickry are still part of our tax system ("Give me that hot new idea to make a big cut in my taxes!"). However, since the Tax Reform Act of 1986, the word "loop-hole" has left the tax professional's vocabulary. In pre-TRA days, it was easy to add a quick yearend tax shelter rather than develop a tax plan. But today, tax planning is back to what it always should have been: a roll-up-the-sleeves and work-through-the-fundamentals approach. It's not easy and not glamorous. But now there's no substitute for a back-to-basics approach.

The following checklist of 10 key areas of tax planning for the small business owner is intended to provide the tax adviser with a working guide to what's important in the coming year:


Most tax advisers look to forms of qualified retirement plans as their first choice for tax-saving techniques. The current deduction--combined with pretax compounding of invested funds--is hard to beat. For the self-employed business owner, careful consideration should be given to the best vehicle. Is it an

* Individual retirement account?

* Keogh plan?

* Simplified employee pension (SEP)?

While SEPs are attractive because they don't require Internal Revenue Service reports, the low threshold for part-time worker coverage can be a problem ($300 per year compared with the 1,000-hour-per-year Keogh rule). And for the business owner able to set aside larger amounts, a defined benefit plan--either a corporate retirement plan or a Keogh plan--still can produce a substantial annual tax deductible investment.

Conversely, those with established plans should evaluate their merits continually. Are plan administration costs with frequent amendments becoming burdensome? Are allocations to other employees outstripping the benefits to the employer-owners? And will the 15% tax on excess distributions present a problem in retirement years? In some cases, abandoning a qualified plan and increasing taxable income to owners currently at the 28% bracket may produce a better long-term result.

[check mark] MINIMIZE FICA

While income tax rates have slid in recent years, FICA costs have risen dramatically. In 1990, the self-employed will have a particular shock as the self-employed rate jumps to 15.3% on a maximum base of $51,300. For small corporations, can earnings be extracted as rent or interest on shareholder loans, rather than as compensation? If there are related corporations with common employees, the common paymaster rule of Internal Revenue Code section 3121(s) should be used to centralize the payroll within one corporation and eliminate multiple FICA-base taxation. For those with proprietorship or general partnership structures, a switch to S status may be helpful. Only direct compensation from an S corporation is subject to FICA; distributions of income to S shareholders are exempt from FICA or self-employment tax. Remember, however, the IRS has the clear authority to attack arrangements where S shareholder compensation is artificially low.


The TRA caused a wholesale reexamination of the choice of entity for a small business. Should it be an

* S corporation?

* C corporation?

* Partnership?

* Proprietorship?

Besides the influence of the changing tax laws, the tax adviser must recognize that ongoing business changes--new products and services, changes in ownership and additional business locations--can merit a change in the form of organization. …

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