3 Things You Can Do to Protect the Tax Savings in Your Entity

Entities are one of the most effective ways to reduce taxes.
The reason entities provide such great tax savings is because they can be treated as a completely separate taxpayer from the owner. Because of this, it’s very important that the line between the owner and the entity doesn’t get crossed.
Whether your entity is new or has been around for years, use the 3 tips below to make sure you have the details in place to protect the tax savings in your entity.
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Have your entity deal directly with its vendors
Take a look at the expenses your entity has.
You may find expenses like telephone, utilities, supplies, insurance, rent, taxes, legal, vehicle, management fees or wages to name a few.
With most expenses, there is usually a written agreement with the vendor. For example, with a telephone, there is a written agreement with the telephone provider.
Review your expenses and determine if there is a written agreement with the vendor. If there is, review the agreement to determine if it is with your entity.
What you may find is that some of the agreements are not in your entity’s name but rather in your personal name. Some agreements you may be able to transfer into your entity’s name without any hassle. Other agreements may be a little more challenging.
Of course, before making any changes to written agreements, you’ll want to discuss the non-tax implications with your vendor and / or attorney.
From a tax standpoint, it’s important to be able to show that the entity is responsible for the expense and the entity is the one receiving the goods and services. A written agreement between the vendor and the entity is the easy way to do this.
But, as I mentioned, sometimes this can be a little challenging so what do you do in those cases where you cannot easily have the agreement be directly between your entity and the vendor?
One option is to document the arrangement you have with your entity as to why you entered into the agreement instead of your entity. You’ll want to document the entity’s responsibilities and your responsibilities so it is clear that the entity is responsible for the expense. You’ll also want to document why this arrangement is necessary from a business standpoint.
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Have your entity deal directly with its customers
Just as an entity should deal directly with its vendors, it should also deal directly with its customers.
A simple example of this is an entity that owns rental property. The rent check should go directly to the entity. If the entity has a property manager, then the rent check should go to the property manager and the property management agreement should be with the entity.
If income is collected in your individual name and not in your entity’s name, it opens the door for the government to make a case that the income is yours and not your entity’s.
Review the income your entity has collected recently and make sure it came directly from the customer.
Title your entity’s assets to the entity
Review your entity’s balance sheet. In the assets section, common assets include bank accounts, investment accounts and other investments, such as property.
Most assets have some form of documented ownership. For example, to open a bank account, paperwork is filled out that indicates the owner’s name.
Review the forms for the assets you see on your entity’s balance sheet to verify your entity is the named owner.
You may find that some assets are not in your entity’s name. In these cases, assess the non-tax implications of changing the ownership to your entity. You’ll want to discuss this with your attorney before making any changes.
If you find that there are non-tax implications that prevent ownership to be in the entity’s name, then it will be very important to document why the entity is considered the owner for tax purposes. Without this documentation, the asset and income and expenses related to the asset could be treated as if the entity does not own them.
The Details Matter
If the government doesn’t respect your entity as a separate entity, it could have a significant impact on your taxes. It’s the details that provide the best support that the entity and owner are indeed separate.
To ensure compliance with requirements imposed by the IRS, we inform you that any US federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and it cannot be used for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein. If you are not the original addressee of this communication, you should seek advice based on your particular circumstances from an independent advisor.

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