Tax saving and shelf corporations
Tax savings can be hard, but not if you know how to go about it. You can use several strategies to save on tax, depending on your particular situation. The income you earn from your business gets taxed in many ways — social security, medicare, and at the federal and state levels. Thus, you need to make an effort to reduce your taxes if you want to make your business a successful one. Success comes from good planning and smart work, and buying a shelf corporation can be one of the smartest decisions that you can take.
When a business loses money
Businesses are created for the sole purpose of making a profit. However, that is not always the case. At times companies make losses. A tax loss is also known as a net operating loss and is the opposite of a net income. A loss can happen at the time of poor economic conditions. Demand suddenly gets reduced, and the business has to make adjustments, but sometimes even after all efforts, the expenses exceed the revenues, resulting in a loss.
However, making losses is not the end of the road for your business. So, what do you do when your business loses money? Here is how you can go about it.
First of all, you have to keep in mind that your business loss is tax-deductible. If you are a sole proprietor, the loss can be deducted from any other income for the year such as the income earned from your job, or from your investments, which is referred to as capital gains in the world of taxation. You can also use the tax loss to offset your profits in the future. By doing so, you get to minimize your taxes.
Partnerships, S corporations, or limited liability corporations are allowed to use business losses to minimize tax. If you have a C corporation, you cannot deduct the business from your personal returns.
How do you know that you are making a loss?
It is not easy to calculate the annual net operating losses of your firm. To do this, you need to tally the business expenses and compare them with the reported business income. Add the loss to other deductions and subtract the figure from the revenue for the year. What you get is the adjusted gross income. To know if you have a net operating loss, start with the adjusted gross income and reduce it by the standard deduction. You should get a negative number.
Now, the next question to resolve is how do you treat the loss your business has just made? You have two options. We will detail these options in the next paragraphs so that you can opt for the one that is the solution to your predicament.
Tax loss carry forward
In this option, you can carry forward the net operating loss for up to 20 years. You can use it to reduce taxable income in the future. To move the loss forward, you must attach a written statement on the tax return for the year that you have incurred the net operating loss. However, it is not possible to take the operating loss back to previous years since the year 2017. In the year 2017, there was a major overhaul of existing tax rules to incentivize businesses to operate in the US.
Both businesses and individuals can exercise this option.
Claiming the carry loss forward
There is a process to determine whether to carry the loss forward or not. Here is what you should do.
First, you must complete the tax return for your business. Make sure your company allows for the carry-forward provision.
The next thing is to determine if you have a net operating loss. If you have more net loss than the profit, you can carry over the net operating loss to the next year.
In case there is still a loss, you have to go back to the third step until the entire amount of business loss has been carried to the future years. When it comes to tax loss carry forward, you must get help for a tax professional. There are specific steps that have to be followed, and you may not be conversant with them.
We would like you to refer to these detailed articles to get more conversant with the nuances of this topic. After reading these, you will understand your situation a lot more, and realize the need for consulting with a professional who can guide you.
Why Net Operating Losses are Valuable but Limited
Can You Deduct Your S Corporation Losses?
Excess loss limits
The excess loss limit is used to reduce personal income. The carry forward to your personal return is only limited to 80% of your taxable income. The limit is set by the IRS. It is very important to reiterate that only pass-through entities such as S corporations enable you to use this option. For standalone entities such as C corps, this option is not available for you.
Ways of reducing profit by showing increasing expenses
When your expense is more than your income, then you have a net loss. So, for your business to operate successfully, you need to have more revenue than the expense. However, if you want to avoid the taxes that come with an increase in profits, then you have to show an increase in your expenses. The operational costs are expenses related to the day to day running of the business-like office cost and labor. The operational costs directly affect your profit margin. You can add a certain percentage to the costs, and thus show reduced profits by hiving off the profits to other entities. You need to raise bills for these expenses so that these look genuine.
Tax advantages of a shelf Corporation
You are probably wondering as to how a shelf corporation helps with tax-saving; we would advise you to keep reading to find out.
A preformed business is an ideal way to solve your tax issues. The shelf companies, as they are commonly known, have been created years back and put on the shelf. Once you buy the shelf company, you need to re-code the business and set up payroll for the business structure. You can then use the shelf corporation to obtain the credit that you need to run your day to day operations.
First, let’s take a look at the myriad benefits you get from buying a shelf corporation.
Speed
When you want to start a new business venture, you have to wait for months to get it off the ground. It also takes a while for the filing to be complete. Using a shelf company means that you do not have to wait. The company is already formed, and all that remains is for you to start doing business.
Flexibility
A successful business always needs a flexible business model so that it can be adapted to the conditions prevailing in the market at that point in time. When you buy shelf corps, there is flexibility in terms of the taxation options available at your disposal. For this, you must choose the appropriate shelf company. Making the wrong choice of shelf company means you get a tax classification that is not suitable for your business. Thus, you need to be careful before you make the decision regarding the corporate structure of your shelf corporation. Such a decision can cost you more in taxes and play a crucial role in sinking your business even before it starts operations. If you feel that you have chosen the wrong type of company, you can reclassify the business into any structure that suits your operations.
Legal protection
One of the main advantages of purchasing shelf corporations is that they offer asset protection capabilities. There is a wall of separation between you, the person behind the shelf company, and the company itself. Thus, creditors cannot reach you personally and hold you liable for the debts incurred by the company. There is no point in spending money on a shelf corporation when it cannot protect itself.
Use a shelf corp to obtain credit
In case your company is not doing well and reporting losses, then you may not have enough money to run the day to day operations. In such a case, you will require funds. However, it will be hard to get funding when you have a net operating loss.
So, what you have to do is to use your shelf corporation to obtain credit. The shelf company allows you to have a shot at credit, even though your existing business is showing losses. This is because the corporation is considered as an entity that has an identity separate from the individual’s behind it. The financial institutions are more likely to give you the loan you need when you try to use a shelf corporation for credit purposes. Investors, clients, and suppliers will also trust a business that has been in existence for many years.
