Watching the road ahead: Tax planning tips for1998

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Prepared by:
American Institute of Certified Public Accountants Harborside Financial Center, 201 Plaza Three, Jersey City, NJ 07311-3881 The information in this brochure is for general purposes
AICPA
A CPA’s Guide for Small Businesses
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INTRODUCTION
YOUR TAX IDENTITY
As a small business owner, you must not only cope with daily responsibilities,
but you must take time to plan which direction your business will
take in the future. One vital component of your planning should be your yearly tax bill. With some preparation and knowledge, you can steer clear of some common mistakes and take advantage of tax laws meant to help small businesses. This brochure can help you plan by providing practical tax information, tax-savings tips, and the latest tax law changes that might affect your business.
TAX BASICS
Your business’ tax bill varies depending on whether its income is taxed at the individual or corporate rate. Individual rates begin at 15%, but may reach 39.6%. Corporate rates are as follows:
Taxable Income The Tax Rate Is
Over $0
but not over $50,000
15% of the amount over 0
Over $50,000 but not over $75,000
$7,500 + 25% of the amount over $50,000
Over $75,000 but not over $100,000
$13,750 + 34% of the amount over $75,000
Over $100,000 but not over $335,000
$22,250 + 39% of the amount over $100,000
Over $335,000
but not over $10,000,000
$113,900 + 34% of the amount over $335,000
Over $10,000,000 but not over $15,000,000
$3,400,000 + 35% of the amount over $10,000,000
Over $15,000,000 but not over $18,333,333
$5,150,000 + 38% of the amount over $15,000,000
Over $18,333,333
$6,416,666.67 + 35% of the amount over $18,333,333
Given the wide range of individual and corporate tax rates, CPAs recommend that you carefully consider how your business is organized. The type of business organization you choose will determine your legal and tax treatment. The basic categories, available in most states, are sole proprietorship, partnership, corporation, and limited liability company (LLC).
Sole Proprietorships and Partnerships. In a sole proprietorship or partnership, business income and losses are “passed through” to the individual owners and are taxed at their individual rates.
C Corporations. A “C Corporation” is the most standard form of corporation, with business income taxed at corporate rates. Under federal and state tax laws, regular C Corporations and their owners are treated as separate taxable entities. When earnings are distributed as dividends, they are taxable to the shareholders at individual rates. For this reason, income from a C Corporation is said to be subject to “double” taxation — once at the corporate rate and once at the individual rate.
S Corporations. An “S Corporation” is a special type of elected tax status in which your business’ income and expenses are passed through to shareholders and taxed at their individual rates, whether or not the income is actually distributed.
S Corporations are generally not subject to corporate income tax, and distributions usually are not taxable to shareholders. So, income is taxed only once. Keep in mind, though, that S Corporation status carries special eligibility requirements.
Personal Service Corporations (PSCs). PSCs are corporations that provide services in such areas as health, law, engineering, architecture, accounting, and consulting. PSCs operating as C Corporations pay a flat tax rate of 35%, regardless of the level of income. You can also elect to have the PSC taxed as an S Corporation, or convert it to an LLC to change its tax treatment, but check first with your CPA.
Limited Liability Companies (LLCs). Generally, LLCs combine the “limited liability” feature of a corporation with the tax treatment of a