Oversimplified, tax planning is the systematic process of staying out of trouble with the Internal Revenue Service (IRS). Personal taxes are usually linked only to employment income while business taxes are linked to the revenues and expenses generated by an entity. Understanding your tax liabilities for your business and personal taxes can help you substantially reduce amounts you owe.
"Pass Through" Taxation
Some business structures require that the personal taxes of the owner be combined with those of the business. This primarily relates to businesses with “pass through” taxation. Pass through taxation means the business entity is not a tax paying, but a tax reporting organization. Sole proprietorships, limited liability companies and general partnerships are common types of businesses that have pass through taxation. The owner is liable to pay the taxes of the business since he or she is the taxpayer instead of the business.
Corporations are treated as a complete entity and can function separately from the individuals who run the company. A corporation pays its own taxes, can be sued or can file bankruptcy. The financial status of the corporation does not affect the personal tax liabilities of shareholders, board members or officers.
Talk to a certified public accountant about establishing a plan for your personal and business taxes, especially if you both work and operate a business. Some categories on your personal tax return may conflict with your business and require professional assistance. For example, some employers reimburse for business travel costs, but you may participate in activities for your business while traveling. An experienced accountant can help you resolve discrepancies so that you are compliant with tax codes.
Even if your business and personal taxes are filed on one tax return, keep all finances separate. The IRS calls the mixing of personal and business finances “co-mingling.” If you treat the money of your business as your personal money, your business entity could run the risk of losing its “corporate veil.” A corporate veil is a nickname for the legal protection of your business under its current formal structure.