Corporate Tax Analysis is Helpful In a Challenging Economy

A qualified financial expert can wade into the intricacies of your pumping company to find ways to raise your bottom line.

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Corporate taxes take a big bite out of small businesses. With today’s high inflation rates and the threat of an economic recession, small-business owners are looking for every possible way to save money.

Is your pumping business taking advantage of every tax break available? By reducing the corporate tax you owe, you’ll keep more money in your pocket, making it easier to finance and grow your business. Roman Basi, attorney and certified public accountant at the Center for Financial, Legal and Tax Planning in Marion, Illinois, recommends a variety of strategies to save money on corporate taxes.

"What comes to the forefront is, ‘How can they structure their company to save taxes?’ ” he says.

When advising clients, one of the first things Basi checks is the legal and financial structure of a company. He performs a tax minimization analysis to compare the tax impact of different organizational structures. Tax classification varies, depending on the way an entity is organized.

For example, many small businesses form their legal entity as a limited liability company, S corporation or disregarded entity. The Internal Revenue Service taxes these entities through the owner’s personal income tax form. All income and expenses flow to the business owner’s 1040. Hence, these entities qualify for “flow-through taxation.”

CHANGING THE DESIGNATION

The business owner files an annual income tax return and a separate corporate tax return (if an S corporation) for the business yet the corporation pays no taxes. Although a flow-through taxation designation may yield the most favorable tax outcome, oftentimes it’s worthwhile to consider alternatives.

The tax minimization analysis answers the question: What happens if we change this company to a C corporation, which is not a flow-through entity? Taxes are paid by the company instead of the business owner. To create a clear and understandable comparison, Basi’s team develops a mock-up of financial statements showing the tax implications if the company switched to a C corporation. The tax minimization analysis considers alternatives to flow-through tax designation.

The results can be surprising. One of Basi’s business clients with a flow-through tax designation was paying taxes at a rate of 37%. By restructuring the company as a C-corp, the tax rate dropped to 21%.

 “The tax minimization analysis goes a long way for small businesses,” Basi says. The analysis especially is valuable for owners preparing to sell or transfer their business. Sellers want to maximize value and earn enough money to transition to a new career or enjoy their retirement. The analysis helps business owners make educated decisions based on financial data, not guesswork or gut instinct.

CHOOSING AN ADVISER

 When it comes to business finances and taxation, a certified professional tax adviser simplifies the decision-making process. Basi recommends selecting a tax adviser who does more than just prepare tax returns and financial statements.

 “I think it’s crucial whenever you’re dealing with tax law and tax advice to speak to someone that’s not just a CPA but a tax attorney who specializes in the federal tax laws,” he says. “They interpret what they see on the tax returns and financial statements as they relate to the tax code.”

 Another factor to consider when choosing a tax consultant is the size of the tax advisory service.

“They should seek out advisers that are similar in size to their company,” Basi says. “Does a small, three-man operation want a 100-person law firm or accounting firm giving them advice? No. Their interests aren’t aligned that way.”

One of the benefits of working with tax advisers is their knowledge of current state and federal tax laws.

“There’s nothing new that business owners absolutely need to know about right now. What they must know about is what’s going to expire,” Basi says.

The most prominent tax legislation about to expire is the federal estate tax exemption, which sunsets at the end of 2025. Currently, a person can pass away and not pay any federal estate tax if they own up to $12.06 million in assets, doubled to $24.12 million if married. If Congress doesn’t act on this legislation before it expires, the federal estate tax exemption reverts to $5 million in total assets, adjusted for inflation (estimated to be $6.6 million), but not doubled for married couples.

“There’s been no discussion on whether it’s going to be extended or not. People have to start planning,” Basi says. Business owners should calculate what their assets are worth. If assets are above the federal estate tax exemption, they may end up paying 40% in federal estate tax. Additionally, state estate tax laws don’t always align with the federal estate tax laws. As the end of 2025 draws closer, Basi recommends keeping an eye on federal and state estate tax exemptions.

HUNT FOR DEDUCTIONS

Another thing to keep an eye on are tax deductions. They lower a business entity’s taxable income, so the business owes less to Uncle Sam.

One important deduction is the qualified business income deduction. The QBI prevents flow-through entities from paying taxes on 20% of their income. “Most business owners know that clause, but some do not. Some of them are not taking advantage of that,” Basi says.

Another one of the most common tax deductions for small businesses is the meals deduction. Business meals are tax deductible. So, keep track of restaurant receipts and meal expenses for corporate events like employee picnics and holiday parties. Also track expenses for meals when traveling for business, entertaining a client or attending business conferences.

Mileage is another expense to track, both for fleet vehicles and private vehicles used for business purposes. The current standard business rate set by the IRS is 62.5 cents per mile. In addition to mileage, business owners can deduct the depreciation of work automobiles placed into service in 2022.

Small-business owners with a home office can claim their office as a tax deduction. Generally, only the portion of their home used exclusively and regularly for conducting business can be claimed. Additionally, the business owner can deduct certain expenses related to the home business, like utilities, rent, mortgage interest and insurance.

Tax credits also are available for retirement plan startup costs and solar energy project investments.

Finding ways to save money on taxes is worth the required time and energy. Taxation typically isn’t always top-of-mind for busy pumpers who are focused on providing great customer service. That’s why it pays to consult with a tax adviser who will look at tax law, tax deductions and tax credits to find all of the money-saving strategies available. By reducing the corporate tax you owe, you’ll have more capital to invest in your business. 



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