Ten Tax Tips for Entrepreneurs
As a business owner, you’re familiar with the emotional highs and lows of entrepreneurship—the sting of downturns and the thrill of success. Tax season often adds to this roller coaster, especially when facing the uncertainty of your tax return. The "black box" of tax calculations and the anxiety of not knowing what you owe can be overwhelming.
While there are numerous tax planning strategies to consider, here are some proactive moves that may help optimize your tax situation for your business or equity-based compensation:
LIQUIDITY EVENTS - Preparing to Sell Your Business or Equity Interests
Transaction Structure: Share Sale vs. Asset Sale
The tax implications of a sale depend on whether it’s structured as a share sale or an asset sale. Generally, sellers prefer share sales for their tax benefits, while buyers favor asset sales. Some arrangements in the tax code allow a transaction to be legally classified as a share sale but treated as an asset sale for tax purposes.
Ownership Considerations
The ownership structure of the business or equity interests before the sale will significantly impact your tax obligations.
Charitable planning
If charitable giving aligns with your goals, structuring and timing donations can reduce your tax burden, especially in high-income years.
Qualified Small Business Stock (QSBS) exclusion
Non-corporate, original investors in C Corporations may qualify to exclude 100% of gains (up to $10 million) from the sale of QSBS. Meeting the requirements for this exclusion could substantially lower your tax liability.
EQUITY BASED COMPENSATION - Your opportunity to participate in the upside of the business
83(b) election
If eligible, an 83(b) election allows you to pay taxes on the value of equity compensation at the time of grant, potentially reducing your overall tax liability. This election must be made within 30 days, so quick action is critical.
Taxation of Equity Awards
Understanding when taxation occurs and how it is calculated will not only give you an idea of potential future tax obligations, but may also give you visibility to perform some proactive tax planning.
OTHER TAX IMPLICATIONS - How you set up your business will influence your tax bill
Entity Selection
Your choice of entity—Partnership, S Corporation, or C Corporation—has significant tax consequences. Selecting the right structure is a foundational step in planning for your future tax liability.
Tracking and Optimizing Startup Costs
Generally taxpayers may deduct up to $5,000 of start-up costs in the tax year a trade or business begins. The $5,000 limit is reduced dollar-for-dollar by the amount the start-up costs exceed $50,000. The remaining start-up costs are amortized over 15 years.
Loss Utilization
Pass-through entities often allow losses to flow through to owners, deductible up to the owner's basis in the company and other criteria. Depending on involvement, losses may be used immediately or carried forward.
C Corporations with net operating losses can carry them forward to offset future taxable income, subject to limitations.
Carried Interest
Gains from applicable partnership interests are typically taxed at short-term capital gains rates (ordinary income) unless held for three years or more. This can significantly affect your tax burden.
Planning for the Future
Every decision you make today can have long-term tax implications. Our team has extensive experience helping entrepreneurs and executives navigate complex tax issues and create tailored strategies.
Schedule a complimentary consultation with us today by clicking the button in the top right corner of this page.
-Interwise Advisor Team
Article is for educational purposes only. Consult your trusted tax advisor for advice upon which you can rely for your specific situation. This is not an offer, or solicitation of any offer to buy or sell any security, investment, or other product. Estimated tax savings will differ from actual tax savings and are calculated based on numerous estimates believed to be accurate but subject to change. Tax services provided by Interwise Tax, a Utah CPA firm. Investment advisory services offered through Valued Wealth Advisors, d.b.a. Interwise, a registered investment adviser. Registered Representative offering securities through Chauner Securities, Inc. (CSI), a registered broker-dealer and Member FINRA/SIPC. Interwise and Interwise Tax are not affiliated with Chauner Securities, Inc. Advisory services are only offered to clients or prospective clients where Interwise and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Interwise unless a client service agreement is in place.