Learn About the Tax Benefits of a Sole Proprietorship

Learn About the Tax Benefits of a Sole ProprietorshipLearn About the Tax Benefits of a Sole ProprietorshipBefore starting a business, it is worthwhile to consult a tax accountant or a business attorney. If you are unsure of the best type of legal structure for your business, you may need a professional to help you determine the most advantageous way to set up your business. Every type of business structure offers specific tax advantages and disadvantages. Here are some of the tax and financial benefits associated with establishing a sole proprietorship Easier Tax Returns to File Tax returns for sole proprietorships are the simplest to prepare and are filed on the sole proprietors (business owners) tax returns. If you can prepare your personal tax returns, chances are pretty good that you can easily prepare your own business taxes for a sole proprietorship. Filing tax returns on sole proprietorships involves preparing a simple IRS form Schedule C. In most cases, you do bedrngnis e ven have to provide lengthy data, and the income and expenses you list on a Schedule C are fairly basic. Free From Mandatory Outside Audits Preparing business taxes yourself can save hundreds of dollars in tax preparation fees. You will also avoid paying for an independent audit, which can run into thousands of dollars. No Tax Penalties for Dissolving the Business If you wish to dissolve the company, there are no special requirements to do so. In other types of business structures, there are legal requirements that govern how you close out a business. Some of these requirements can have tax implications, which are not imposed on sole proprietorships. You Can Steer Money to Drive Your Own Deductions As a sole proprietor, you own and manage your business. This means you determine spending, borrowing, and reap all the profits (unless you have investors). Hire, Fire, and Determine Salaries of Your Employees Having the freedom to make decisions indirectly affects your tax es because you can make adjustments to cash flow and payroll needed to keep your business finances in check. For example, if your profits are high and you need more tax write-offs, you decide how to offset your income. Savings on Healthcare Reimbursement Arrangements Savvy sole proprietors can also use Healthcare Reimbursement Arrangements (HRAs) to get access to healthcare with the added benefits of double tax deductions. Boss Your Kids Around and Get Tax Deductions for It Sole proprietors can hire their own minor children and not pay any payroll taxes until they turn 18. There are few restrictions. Traditional employees typically trigger payroll taxes of at least 7.65 percent of wages paid. Summary No matter what type of business structure you decide to form, you will have to report your salary, income, profits, and losses, and other financial information on both state and federal income tax returns. An advantage of forming a sole proprietorship is that although your b usiness income counts as your personal income, any losses your business takes may also be deductible for you. Business deductions for a sole proprietorship generally can reduce your personal taxes, as well.