Page 295 - DCOM301_INCOME_TAX_LAWS_I

Income Tax Laws – I

Notes For liability purposes, the individual and the business are also one and the same. Thus, legal
claimants can pursue the personal property of the proprietor and not simply the assets used in
the business.

Notes As a self-employed individual, one can have a number of income tax planning
opportunities. Here are some which one may wish to consider:
1. Shifting and Timing Income: Shifting income to family members can be an important
tax planning technique. If you run your own business, your ability to shift income to
a family member who is in a lower marginal tax bracket can be a significant
advantage. Your relative may benefit from the increased income and you may
benefit by the decreased tax liability. It’s also possible that the overall amount of
federal income taxes paid by the two of you would be lower. But be aware that the
IRS could question an unreasonable amount of compensation paid to a family
member, considering the services actually provided by the family member.
As a self-employed taxpayer, you also have greater control and flexibility on timing
the receipt of your income. This means that you have more control when you pay
tax on the income.
2. Planning Retirement: Establishing a retirement plan is another tax planning advantage
for the self-employed. If you’re self-employed and have no employees, a qualified
retirement plan may allow you to place pre-tax dollars into a retirement account to
grow tax deferred until withdrawal. If you have employees, your business may
have to provide coverage for them as well. The type of retirement plan that your
business should establish depends on your specific circumstances.
3. Reviewing Employee Benefit Plans: Aside from retirement plans, there are other
employee benefit plans—such as cafeteria plans and medical benefit plans. Employee
benefit plans play an important role in attracting and retaining employees. Sole
proprietors may also derive certain limited benefits under these plans.

4. Considering Business Expenses and Other Deductions: Make sure your business is taking
advantage of all of the deductions it’s entitled to, including deductions for certain
start up costs. For instance, you may be able to deduct a portion of the expenses for
a business trip even when the trip is combined with vacation. Other key deductions
that you should consider include the use of a home office, automobiles and business
assets.
A sole proprietorship is an individual (or married couple) who owns a business which is not
otherwise incorporated or organized as a separate legal entity (i.e., there is no partnership,
limited liability company, corporation, etc.). Putting it differently, sole proprietorships are
businesses where an individual conducts business and holds title to property in his or her name
and is directly and personally liable for the obligations of the business. There is no corporate
entity or other legal device employed to hold the business assets or ameliorate the liability of
the owner for any debts or obligations of the business.
Despite the personal liability that comes with the sole proprietorship, this form can be preferable
where the owner contemplates no complex financing and no co-owner relationships with other
parties. In fact, there are 15 to 20 million sole proprietorships in the United States. This comprises
over 80% of the businesses in the United States!
Maintenance costs are very low for the sole proprietorship. Apart from any “doing business as”
filings necessary if the sole proprietorship is using a name different from that of its owner,

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