Entities are one of the most effective ways to reduce taxes.
Timing is usually everything when it comes to entities because in most cases, the tax savings can’t happen until the entity is set up. Usually in the rush to set up the entity, there are details missed that can jeopardize the tax savings.
Whether your entity is new or has been around for years, use this checklist to make sure you have the details in place to protect the tax savings from your entity.
#1 Does your entity deal directly with its vendors?
Take a look at the expenses your entity has subsidiary governance.
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.
#2 Does 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.