“What’s love got to do with it?” – Tina Turner
Well it turns out that in business, it can impact a lot. If you are one of the millions of people who started a business last year, how you set up your taxes can have huge implications for your family.
Whether you are working with your significant other or not, Jonathan Levens, partner at Moore Colson CPA and Advisors, has some tax advice you need to know as tax season rolls around.
Levens answered these questions about how your relationships can your businesses taxes:
QUESTION: Is there a common tax mistake you see couples make during tax season?
The most common mistake that I see couples make during tax season is not maintaining a shared folder of relevant tax information. Not doing so can result in “overlooking” of items that may have a material impact on their tax returns. A common example is couples often make charitable contributions both individually and as a couple. If the couple does not have a centralized location to save the documentation, it is easy to lose track of donations and miss out on tax deductions.
QUESTION: Is it always best to file jointly with your partner?
In most situations it is more tax advantageous to file jointly. However, there are both tax and non-tax driven reasons why a couple may choose to file separately:
- If you have student loan debt on which the repayment plan is income based, filing separately may lower your payment obligation.
- If one spouse has very large medical expenses, filing separately could allow for greater deductibility of such expenses.
- If one spouse is the owner of a successful business, filing separately may allow you to qualify for the qualified business income deduction via the splitting of the income.
- Filing jointly results in each spouse being liable for the resulting income tax liabilities and it may be preferable to file separately. Common situations would be a couple of that is in process of getting divorced or want to keep their finances separate.
QUESTION: When should someone look into an S-Corp versus an LLC?
A business owner should consider electing to be taxed as an S-Corporation if the business is primarily service based and is expected to be profitable year-over-year. The primary tax benefit of being an S-Corporation is the annual profit is not subject to self-employment tax. By electing S Corporation status the business owner may be able to minimize self-employment tax on income that would otherwise be subjected to if operating as an LLC.
QUESTION: What if the business…or the relationship…doesn’t last? What should be your first steps from a tax perspective?
In situations of a failing business, it is important for the owners to consult with a knowledgeable tax advisor to understand the tax implications of the wind-down process. For example, failing businesses often have liabilities that may not get repaid in full, which can result in cancellation of debt income. Consulting with a tax advisor as early as possible can help the business owner understand the tax implications and potentially mitigate the impact.
In situations of a failing relationship, particularly if you are headed down the road of a divorce, it is important for each spouse to have a good understanding of their historical tax reporting and plan ahead for the impact the separation will have on them as individuals. In addition, the filing of a joint return results in each spouse being liable for the resulting tax liabilities. As a result, consideration should be given to filing separately so that each spouse is responsible for their own reporting and the associated income tax liabilities is limited to the activity that they report individually.
