BUSINESS

Considerations for New Businesses

Closely Held Corporations

Retirement Plans for the Self-employed

Deducting the Cost of Business Assets

Other Deduction Strategies

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Considerations for New Businesses

Entrepreneurs launching start-up businesses may incur substantial expenses. The costs of doing market surveys, traveling to find customers or suppliers, and consulting with lawyers and accountants are examples. Within limits, these kinds of expenses are generally deductible once the new business is started, if an election is made.

Small business stock gain exclusion. Some new small corporations may be able to use a special provision in the tax law to attract investors. The provision allows a noncorporate taxpayer who holds “qualified small business stock” for more than five years to exclude 50% of any gain realized on sale or exchange of the stock from taxable income. (There is a 60% gain exclusion for certain empowerment zone stock.) Since the tax rate on small business stock gains for the 50% includable in gross income is capped at 28%, this translates to a maximum 14% tax on the capital gain. (7% of any excluded gain is an AMT preference, and various restrictions apply.)

Subchapter S election. Newly incorporated businesses will also wish to consider whether making an “S” election is desirable. Corporations that elect S status generally pay no income taxes at the corporate level. Instead, corporate income, deductions, losses, and credits are divided among the shareholders who include their shares on their own tax returns.

In deciding whether to elect S status for your company, you will want to weigh many factors, including projected personal and corporate tax rates, the availability of fringe benefits, and whether meeting the S corporation eligibility requirements is a potential problem.

Partnerships. The partnership form of doing business is highly flexible. For tax purposes, partnerships operate on the same type of flow-through basis as S corporations. Thus, the partners — rather than the partnership itself — pay taxes on partnership income.

LLCs. A limited liability company (LLC) is another type of business entity. An LLC with more than one member can choose to be taxed as a partnership or a corporation. A single member LLC that doesn’t elect corporate tax treatment is generally considered a sole proprietorship.

Buying an existing business. If you plan to buy an already established business, you’ll have many tax planning issues to consider. One of the more important ones may be how best to allocate the purchase price among the assets of the business.

Some of those assets may consist of so-called “intangibles” such as goodwill, customer or client lists, patents, and covenants not to compete. Acquired intangible assets, including goodwill, may be deducted ratably over 15 years. Tax factors such as these may be critical in determining an appropriate purchase price.