Family Business Tax Reduction.

 Family Business Tax Re

 Family Business Tax Reduction.duction.

This article discusses how family businesses can reduce their tax burden. It talks about how certain strategies for reducing your taxable income may be available to you, including making gifts of property, donating appreciated assets, and engaging in a like-kind exchange. If you are the owner of a small business and want to minimize your tax liability for the year ahead, it could be worth reading this article.

Family businesses can pay less taxes! Check out these strategies that offer significant benefits 

Running a family business might sound like fun—and it is! But there’s one big downside: taxation. If you want to keep your business free from taxes and pass it on to your kids as part of an estate plan, there are ways to help make that happen.

A family business is a business that has been passed down through generations and continues to be owned by members of the same family. Family businesses can be everything from a local deli shop to a large corporation. Like any other business in the U.S., families with family businesses have their share of tax deductions, write-offs, credits, and other tricks for keeping their tax liabilities low. When it comes time to pay taxes on all those profits, though, some of those strategies won’t work. That’s because of the “family business” rule.

The Tax Law and Family Businesses

If you own a family business, you probably enjoy the fact that it’s a relatively easy structure to operate. That can lead to a problem, though. There are certain advantages to operating in a small business format—such as easy accounting and simpler compliance—that are lost if your company grows too large. For example, oil companies can qualify for special tax breaks if they don’t exceed a certain level of production or have too many employees. If they get too big, though, those benefits disappear.

The same sort of thing happens with businesses that are owned by members of families. A tax law known as the “family business” rule states that certain tax deductions can be used by a business and its owners only if there are fewer than five full-time employees. If a company has more than five employees, any additional deductions will be disallowed, and any losses will not be able to be passed on to the owners.

What about a family-owned corporation? In this case, the same sort of restrictions apply: A family-owned corporation must have fewer than five full-time employees who own stock in the company to claim those benefits. If the corporation has more than five full-time employees, any additional deductions will not be allowed. If an owner sells her stock before the company is acquired by another one, she may be entitled to some of the tax benefits that would have been available had she retained ownership.

Reducing Tax Liability on Family Businesses

As you can see, the family business rule eliminates a lot of potential tax benefits for family business owners by preventing them from claiming certain deductions or credits. Some of the most common ways to reduce tax liability on a family business, then, are designed to stay within the law so that all the deductions can be claimed. Here are some examples:

Make Gifts of Property or Gain from Selling Appreciated Assets

The “family business” rule does not apply to gifts or other types of transfers made by an owner to her children, grandchildren, spouse or other family members. The most common way for family businesses to take advantage of this benefit is by gifting appreciated assets instead of selling them. For example, if your family business has a lot of real estate and the market value of that land goes up, you might want to sell the land to avoid paying taxes on the appreciation. But instead of selling the property outright, you could consider gifting it to your children or grandchildren in exchange for them making a cash gift to your family business.

With that as a base, though, there are other ways for families to make gifts of property. One way is by making a short sale. If your family business is struggling financially and you’re looking to get out of the investment, you might consider selling a portion of the business in exchange for some cash. But instead of selling the whole company outright, give some stock to your children or grandchildren and let them make a cash gift. That way, they’ll pay taxes on their portion of the gain, but can pass along all the same tax advantages to you.

Another strategy for gifts is what’s known as a like-kind exchange. Let’s say that you own 100% of a company that owns rental property in Scottsdale, Arizona. If you decide one day to sell all of your time share, you could choose to sell it in a like-kind exchange, which is a transaction involving assets in which the cost basis equals the fair market value. In this case, you’d pay your children or grandchildren the fair market value of their interest in your business—just as they would have received if they had held real estate instead of stock.

Change Your Structure

In many ways, the family business rule doesn’t apply to most tax breaks intended to benefit corporations. For instance, there are several ways that corporations get an advantage over individuals by being able to reduce their taxable income and pass on those benefits through the corporate form.

The most significant tax benefit corporations receive is the ability to deduct any losses they incur when they make an investment. That’s why, in many cases, one of the simplest ways to reduce taxes on a family business is to convert the business from an LLC or sole proprietorship into a corporation. That way, any losses incurred by the business can be passed along to you as a shareholder of that corporation.

Other alternatives for reducing taxes on your family business are more complicated and involve more steps, such as setting up an employee stock ownership plan (ESOP) or starting a partnership. Each of these strategies carries its own set of risks and benefits that you’ll need to explore with your attorney before choosing one over another.

Contact the Law Offices of John L. Rogers

The tax laws can make it difficult to reduce your taxes, but that doesn’t mean you can’t find ways to do so on your family business. The best first step is knowing what you have in terms of tax deductions and credits, and then identifying which ones you can use to minimize your taxes. Contact the law offices of John L. Rogers today at (559) 347-6000 to schedule a free initial consultation with a member of our team who can help you determine which strategies will work best for your situation.

Conclusion

In some cases, you may be able to reduce your tax liability on your family business by taking advantage of state and federal tax credits. As a general rule, the IRS primarily focuses on individuals and their income, so it’s fairly easy to take advantage of the credits that are available for small business owners.

One of the most common ways to reduce taxes on a family business is by taking advantage of states’ enterprise zones. In order to qualify for these credits, you must meet certain requirements that include meeting certain personnel levels.