Questions around whether to invest business profits to avoid tax obligations is a popular issue among many business owners. Understanding your full tax implications and possible tax liability is critical for any business owner regardless of their stage in the company.
Recognizing the difficulty of discovering how to invest business profits to avoid taxes; its best to consult with a tax strategy attorney in Atlanta to discover the strategies available to you and which align with your personal and professional goals.
Understanding Re-Investment as A Business Expense
If you are generating profits from your business and are looking for ways to minimize your tax liability in a legal manner, your certain re-investments can be classified as a business expense. This could decrease your taxable income. Expenses are defined as consumable items; meaning that if the item is consumed or used during a given period it is a reduction to your revenues. To invest business profits, you want to ensure this meets your individual goals.
Operating expenses, for example, might include; supplies, payroll, utilities, and rent. Operating expenses should not be confused with other expenditures that might have been economic benefit over a period of time. A capital expenditure is not classified as consumable in nature; meaning that the initial outlay for the cost of these capitalized items is not classified as an expense.
The cost, however, can be recorded as an expense in the form depreciation and be amortized over the useful life of the asset. This will vary according to asset classification and should be handled by an experienced tax professional. Inventory items are classified as the assets on a balance sheet and do not lower an income.
However, the cost related to the item when used to create each product or service that you sell is classified as an operating expense. This can help with your tax strategy. The bottom line is to remember that not all investments to your business will lower your income and resulting income taxes.
Understanding Payments to Owners Versus Tax Reporting
Businesses that are organized as limited liability companies, partnerships, sole proprietorships or s-corporations are passed through structures for tax liabilities and profits. This means that the business tax return will report each owner’s share of the business losses or profits and those owners will report those results on their personal tax returns.
Any cash that is paid out to owners in the form of dividends, salary, or a withdrawal does not have to equally income reported on the tax returns. In the event that the reported net income amount is less then what is paid out to owners the retained profits can be reinvested to support and grow the business. The profits will otherwise become part of the owner’s cost basis after net income has been reported and taxed for the year in which it was earned. For more support on these advanced tax strategy issues as a business owner, schedule a consultation with a Georgia lawyer.