This is the time year when everyone’s thoughts about taxes are centered on the filing of their prior year tax return. While that’s an important matter, the fact is that the book is already closed on the prior tax year. There is very little that can be done to effect change to your tax position for a year that is already over.
Therefore, we would like to encourage you to start looking forward to the current year. Any major improvements to your tax position require you to take action during the tax year. The best action you can take is to…
Start. A. Business.
Statistics estimates that over 70% of working Americans have a side business — it may be a multi-level marketing business, home-based baby-sitting services, or photography for family and friends. However, those same statistics indicate that less than 20% of working Americans formalize that business to actually work for them. That leaves a whopping 50% of working Americans who have the makings of a business, and the related expenses of a business, but that are not taking advantage of the great benefits that business can provide related to taxation. That’s why we have outlined the simple 3-step process that will allow you to formalize your business, and turn it into a great tax savings vehicle.
Bear in mind, this “new business” does not require you to quit your day job. We certainly don’t advocate quitting your job to start a business. While this new venture will not replace your day job (for now), in the meantime it makes sense to use this “side hustle” to your benefit for tax purposes.
Step 1: Form a legal entity
The most cost-effective business entity is the limited liability corporation (LLC). In Oklahoma this entity can be filed with the Secretary of State on-line, costs $100, and takes less than 10 minutes to complete. Once the filing is submitted electronically it takes 48 hours or less for your business to be official. Use the link below to form your domestic limited liability company in Oklahoma.
Form an LLC in Oklahoma
Step 2: Obtain an employer identification number (EIN) from the IRS
The IRS assigns EIN number absolutely free. Using the link below you can apply for an EIN directly from the IRS’ website in less than 10 minutes. You’ll simply enter the exact name and address information used to file for your LLC and you’ll have your EIN in minutes.
Step 3: Elect to have your LLC taxed as an S-Corporation
This is the most tax advantaged entity for small businesses. This step in the process requires you to complete IRS form 2553 using the name and EIN you obtained in steps 1 & 2. The instructions to the form are relatively easy to follow and once the form is complete you can fax or mail the form to the IRS and your business set up is complete. The IRS takes up to 60 days to confirm your election, and you will receive a letter in the mail once the election if accepted. Use the link below to complete the form.
Complete IRS Form 2553
This really is the simple process that lays the foundation for you to reduce your tax obligations for this year and many years to come. Now… with the 3-step process to your new tax savings vehicle, comes three new responsibilities as well:
1. Your LLC needs to renewed with the state each year. The renewal fee is $25 and is due on the anniversary date for which the LLC was formed. You’ll go back to the SOS website to do so each year.
2. You will now have a business tax return that is due on March 15th of each year. This is a second return in addition to your personal return. Your first business return will be due 3/15/2020.
3. You will want to get a CPA involved to help you take full advantage of your new tax savings vehicle and to prepare your new business tax return. While you can do the first steps in this process alone, you will have the best results when you consult with a professional to obtain all the benefits, and avoid the pitfalls that come with having a business geared toward tax savings.
Connect with us when you’re ready to take your new tax savings vehicle to the next level. And of course, consult with your attorney and/or your CPA (us) if you need help with this process. We can complete your new business set up for you at our standard rates and have you on track for success within a matter of days.