Page 187 - DCOM508_CORPORATE_TAX_PLANNING

Corporate Tax Planning

Notes Unlike other forms of business entities, there are no specific statutes governing the creation and

existence of sole proprietorships. Instead, basic rules of contract law, tort law, and property law
will apply. In addition to these basic concepts, all regulatory restrictions applied to businesses
generally will apply to the sole proprietorship (e.g., environmental laws, civil rights laws, etc.).
The existence of the sole proprietorship ends upon the death of the owner and the property of
the business will be disposed of according to the terms of the owner’s will. All assets of the sole
proprietorship are owned by the owner as personal property. On the whole, if you are planning
to have a business of any sophistication, you probably want to avoid this entity.
According to the IRS, you’re self-employed if you carry on a trade or business as a sole proprietor,
an independent contractor, a member of a partnership or if you’re otherwise in business for
yourself. You can be a full-time employee and still have self-employment income from a side
job. To determine whether a particular income is self-employment income (rather than employee
wages, for example), look at the source of your income and the extent of your involvement in the
activity. If you’re self-employed, understand the self-employment tax and be aware of the tax
planning opportunities.

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Caution The Internal Revenue Service (IRS) permits one exception to the “one sole owner”

rule. If the spouse of a married sole proprietor works for the firm but is not classifi ed as
either a partner or an independent contractor, the business may still considered to be a sole
proprietorship and forgo having to submit a partnership income tax return. Also, the sole
proprietorship can avoid self-employment taxes.
One major area of concern for many self-employed individuals is the high cost of health insurance.
Fortunately, some of your health-care related expenses may be tax deductible.

Example: You may be eligible for the self-employed health insurance deduction, which
would enable you to deduct the cost of health insurance that you provide for yourself, your
spouse and your dependents. This deduction is taken on the front of your federal Form 1040 (i.e.,
“above-the-line”) when computing your adjusted gross income, so it’s available whether you
itemise or not.
Contributions you make to a Health Savings Account (HSA) are also deductible “above-the-
line.” An HSA is a tax-exempt trust or custodial account you can establish in conjunction with a
high-deductible health plan to set aside tax-free funds for health-care expenses.

Its main features are as follows:-
1. Ease of formation is its most important feature because it is not required to go through
elaborate legal formalities. No agreement is to be made and registration of the firm is also

not essential. However, the owner may be required to obtain a license specific to the line of

business from the local administration.
2. The capital required by the organisation is supplied wholly by the owner himself and he

depends largely on his own savings and profits of his business.
3. Owner has a complete control over all the aspects of his business and it is he who takes all
the decisions though he may engage the services of a few others to carry out the day-to-day
activities.

4. Owner alone enjoys the benefits or profits of the business and he alone bears the losses.

5. The firm has no legal existence separate from its owner.
6. The liability of the proprietor is unlimited i.e. it extends beyond the capital invested in the
fi rm.

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