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Unit 8: Tax Planning for Different Organisations

Notes

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 signifi cant

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 specifi c circumstances.
3. Reviewing Employee Benefi t 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 offi ce, automobiles
and business assets.

A sole proprietorship is an individual (or married couple) who owns a business which is not
otherwise incorporated or organised 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” fi lings necessary if the sole proprietorship is using a name different from that of its owner,
no documentation is needed to organise a sole proprietorship and no special record-keeping
or corporate formality is necessary. You would not even need an attorney to form this type of
business entity. By hanging out a sign, you have opened up a sole proprietorship.

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