In the United States, businesses pay income taxes
For millennia, governments have taxed businesses and individuals. Payment of taxes on income generated by business is a quarterly/annual requirement in the United States. For as long as the business remains active, it will pay taxes. The filing of returns and the payment of income taxes can sometimes overwhelm small businesses owners.
As a small business owner, it may be possible to minimize taxes, by using a different business structure.
Select the way your company will be taxed
Some options for your business include:
- C-Corporation (Inc.)
- C-Corporation – Subchapter S
- Limited Liability Company
- Sole Proprietorship
Selecting your company’s jurisdiction
Where you choose to incorporate or organize your company will impact your taxes.
If your company does business in several States, they will usually require you to pay taxes on income generated in each State.
Companies can, however, “shop” for States that do not have an income tax. In 2019, South Dakota and Wyoming do not impose State corporate income taxes or State individual income taxes.
Some jurisdictions give more favorable tax treatment to businesses incorporated/organized in that state which also have their principal office in the State, as compared to those formed in another State.
But, beware, in some States, lower State business income taxes may increase the total amount of Federal business income taxes.
Product logistics, the availability of qualified employees, energy costs and natural resources can sometimes dictate which State you select to incorporate or organize your business.
Federal Income Taxes for C-Corporations
C-Corporations are taxed on profits. A shareholder receiving a C-Corporation’s profit distribution will also pay income tax on the profits received.
The Tax Cuts and Jobs Act of 2017 capped the maximum tax rate for income generated by a C-Corporation at 21%.
Federal Income Taxes for Pass-Through Legal Entities
Subchapter S Corporations, Limited Liability Companies and Partnerships are known commonly as “pass through” entities. Profits and losses generally pass through to the owners of the legal entity, so this income will be declared on the owners’ individual income tax returns.
With some exceptions, the Tax Cuts and Jobs Act of 2017 allows a Qualified Business Income Deduction of up to 20% of Qualified Business Income for sole proprietors and pass-through entities.
What is Qualified Business Income?
Qualified Business Income is the net amount of qualified items of income, gain, deduction and loss from any qualified trade or business. Only those items included in taxable income are counted and these items must be effectively connected with a U.S. trade or business. Items such as capital gains and losses, certain dividends, and interest income are excluded from Qualified Business Income.
Most growing companies eventually reach annual revenues where the combination of business counsel and tax counsel can improve the bottom line for your company.
Business Patent Law, PLLC does not provide tax counsel for specific matters, but does provide business counsel for businesses.
If you have questions about your company’s business structure, please contact Business Patent Law, PLLC, and we will discuss possibilities for your business.
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