Tag Archive for: taxes

save on business taxes in California

What is the Best Business Structure to Save on Taxes?

When starting a business, what you pay in taxes is one of the most important considerations. This is especially true in California, where state taxes are among the highest in the country. Choosing the right entity structure can help minimize your tax liability, but this is not a “one size fits all” proposition. 

There are tax advantages and disadvantages to each entity structure, and the right entity for you will depend on the type, size, and other specifics about your business. Here is a closer look at the tax implications for the various business entities:

Sole Proprietorship

A sole proprietorship is the easiest way to go into business for yourself, and this a popular choice among freelancers and independent contractors. There is no additional paperwork to file and no entity that needs to be set up to go into business is a sole proprietor, and as far as the IRS is concerned, all of the assets, liabilities, and income of the business are considered to belong directly to the business owner. This also means that a sole proprietor would not have to pay the additional taxes and fees California charges for other entity structures (more on this later).

The top income tax rate for a sole proprietor is 29.6% if they qualify for a “pass through” deduction. If the sole proprietor exceeds the income threshold for the “pass through” deduction, they may be better off setting up a formal entity. One of the biggest drawbacks for sole proprietors is having to pay self-employment taxes in addition to regular income taxes. Essentially, this means you are paying double what an employee would pay for Social Security and Medicare.

General Partnership

A general partnership is similar to a sole proprietorship, except that the business is owned by two or more individuals. Again, there is no additional paperwork to file and no entity to set up, and all business income is passed through to the owners and taxed at their individual rate. And as with a sole proprietorship, owners of a general partnership do not have to pay additional California corporate taxes and fees, but the owners do have to pay self-employment taxes.

S Corporation

An S corporation and is an entity that is often set up by small to medium-sized businesses largely for tax purposes. Like a sole proprietorship or general partnership, an S corporation is a “pass through” entity where net income flows directly to the business owners and is taxed as personal income. One of the primary tax advantages of an S corporation is the ability for owners to receive dividends, which are taxed at a different rate and not subject to self-employment taxes. However, in California, an S corporation must pay a franchise tax of 1.5% of net income, and their minimum franchise tax is $800 annually, even if there is no net income at all.

C Corporation

A C corporation is a traditional corporate structure typically used by larger businesses and for startups who plan to go public in the future. One of the biggest tax advantages for a C corporation is the new 21% federal corporate income tax rate that went into effect in 2018. The primary drawback is the potential for “double taxation”, in other words, net income from the business can be taxed at both the corporate and personal levels. In California, the state corporate tax rate is 8.84% or an alternative minimum tax (AMT) rate of 6.65% if there is no net taxable income.

Limited Liability Company (LLC)

An LLC is one of the most flexible entities from a tax standpoint. LLC owners (known as “members”) can choose to be taxed as a sole proprietor, partnership, S corporation, or C corporation. An LLC is a “pass through” entity, and members report profits and losses on their personal federal income tax returns. However, California charges LLCs with a minimum $800 tax, along with a franchise tax that is calculated using a complicated formula that is based on gross income.

Speak with an Experienced San Diego Business Lawyer

Determining the best business structure to save on taxes can be complicated, and this will always depend on the specific circumstances and needs of your business. The best place to start is to speak with a seasoned business attorney to discuss your options.

At Garmo and Garmo, LLP we provide comprehensive guidance on business entity formation and all other types of business legal matters in San Diego and throughout Southern California. Call our office today at 619-441-2500 or send us a message through our online contact form to schedule a free consultation with one of our attorneys.

divorce and taxes in California

How Divorce Affects Taxes in California

The marriage dissolution process has a lot of financial implications. There are issues such as child support, alimony/spousal support, division of marital assets, and many others. These issues will affect your finances in many ways, and one area that many divorcing couples do not put enough thought into is the tax implications once the divorce is finalized. 

No matter how long you have been married, if you decide to get a divorce, it will impact your tax situation. And if you do not look at the tax consequences ahead of time, you may end up with some very unpleasant surprises when it comes time to file your taxes. 

As the 2019 tax filing season comes to an end, this is a good time to look at divorce and taxes, and how a marriage dissolution can affect your tax situation.

Tax Filing Status Changes

After a divorce, your tax filing status will change. However, the filing status you use depends largely on when your divorce was finalized. If you finalized your divorce any time before December 31st, you are considered to be unmarried for the entire year. This means your tax filing options would be “single” or “head of household”.

In general, it is more advantageous to file “head of household”. However, you must meet certain qualifications to be eligible for this status. You must have paid for the upkeep of your home for at least half of the year, and you must have had at least one dependent living with you for at least half the year to claim the “head of household” status.

If you were still married as of the first of the year, your filing status options would be “married filing jointly” or “married filing separately”, or “head of household” if you lived apart from your spouse for the last six months of the year and meet other qualifications for this status.

“Married filing jointly” generally provides better tax benefits than the “married filing separately” status, although this is not always the case. That said, there are other reasons you may want to consider filing a separate return rather than filing jointly with your ex-spouse. One major reason is if your ex is untrustworthy or uncooperative or you have other reasons to believe that filing a joint return will in any way jeopardize your financial and/or tax situation.

Division of Assets

The division of the marital property is generally a tax-neutral event. However, there are some couples that have significant assets and more complicated finances. In these types of cases, various activities could result in tax consequences. For example, if you are liquidating certain assets (such as selling real estate property that does not qualify for an exemption), you may be responsible for capital gains taxes.

Another area in which there could be tax complications is with the division of retirement accounts. Portions of a retirement account that were added or appreciated during the course of a marriage are generally considered part of the marital estate. However, in order to divide these assets without being penalized by the IRS, you will most likely need a Qualified Domestic Relations Order (QDRO). QDROs are complex documents that are required for many types of retirement accounts. These documents must be drafted carefully and precisely in order to meet the required specifications to make them legally enforceable. Consult your attorney for more details on QDROs and if you will need one for your situation.

Who Claims the Children on their Taxes?

The question of who can claim the children as dependents on their taxes used to be an important issue that was often negotiated during divorce proceedings. Generally, the custodial parent is the one who has the right to claim the children unless they sign a written release on their tax return giving the other parent the right to claim the children. However, the Tax Cut and Jobs Act of 2017 got rid of personal exemptions and raised the standard deduction to make up for it. This means that there is no longer any direct financial benefit to claiming children as dependents until this provision expires in 2025.

Claiming the children as dependents is important for other reasons, however. For the custodial parent, they must have at least one dependent for at least half of the year to claim “head of household” and receive the potential benefits of this tax filing status. Having children to claim may also make you eligible for the Child Tax Credit or Child and Dependent Care Credit, and it could help you qualify for a higher Earned Income Tax Credit.

Child Support and Alimony

Child support is tax-neutral; the payor cannot deduct payments on their taxes, and the payee does not have to claim this support as income. Alimony/spousal support payments are deductible for the payor and taxable as income for the payee if your divorce was finalized on or before December 31, 2018. Under the Tax Cut and Jobs Act of 2017, however, for all divorces finalized on or after January 1, 2019, spousal support payments are now tax-neutral.

Speak with a Seasoned Divorce and Family Law Attorney in San Diego

If you are facing a divorce, there will be many issues that will need to be dealt with, many of which concern your finances and taxes. For this reason, you need a lawyer with extensive knowledge of this area of the law, and an in-depth understanding of how these issues will apply to your personal situation. 

For skilled guidance with divorce and other family legal matters in San Diego, El Cajon, and throughout Southern California, call Garmo and Garmo today at 619-441-2500 or message us through our online contact form to schedule a consultation.