Posted on February 19, 2025

Written by: Angelica Roxas

Choosing the right tax strategies is crucial for business owners aiming to optimize their tax liabilities and enhance profitability. This article explores two effective tax strategies—Pass- Through Entity Tax (PTET) and Entity Structuring—tailored for various business structures, including LLCs, S Corporations, C Corporations, and Sole Proprietorships.

1. Pass-Through Entity Tax (PTET): A SALT Deduction Workaround

The Tax Cuts and Jobs Act of 2017 imposed a $10,000 cap on state and local tax (SALT) deductions for individuals, significantly impacting owners of pass-through entities. To mitigate this, many states have enacted elective PTET regimes. Under PTET, pass-through entities such as S Corporations, partnerships, and LLCs can elect to pay state income taxes at the entity level, thereby circumventing the SALT deduction cap. This allows the business to deduct state taxes as a business expense on its federal tax return, effectively reducing the owner's adjusted gross income (AGI) and potentially lowering overall tax liability.bpbcpa.com

Benefits of PTET:

• SALT Deduction Optimization: By paying state taxes at the entity level, businesses can fully deduct these expenses, bypassing the individual SALT cap.
• AGI Reduction: A lower AGI can lead to additional tax benefits, such as increased eligibility for certain deductions and credits.

Considerations:

• State-Specific Regulations: PTET elections and benefits vary by state. It's essential to consult with a tax professional to understand the implications in your state.· 
• Impact on M&A Transactions: For businesses considering mergers or acquisitions, PTET elections can affect the valuation and structure of deals.

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2. Entity Structuring: Aligning Business Form with Tax Goals

Selecting the appropriate business structure is fundamental to tax planning. Each structure— 

Sole Proprietorship, LLC, S Corporation, and C Corporation—has distinct tax implications.

• · Taxation: Income is reported on the owner's personal tax return and subject to self- employment taxes.
• · Consideration: While simple to establish, sole proprietorships offer no liability protection and may result in higher personal tax burdens.

Limited Liability Company (LLC):

• · Taxation: By default, single-member LLCs are taxed as sole proprietorships, and multi- member LLCs as partnerships. However, LLCs can elect to be taxed as S or C Corporations, providing flexibility.
• · Benefit: LLCs offer liability protection and potential tax advantages, depending on the chosen tax classification.

S Corporation:

• · Taxation: Profits and losses pass through to shareholders' personal tax returns, avoiding double taxation. Shareholders can be employees, receiving salaries subject to payroll taxes, while additional profits are distributed as dividends, which may not be subject to self-employment taxes.
• · Benefit: This structure can result in tax savings by reducing the amount subject to self- employment taxes.

C Corporation:

• · Taxation: Subject to corporate income tax rates, with potential double taxation when profits are distributed as dividends to shareholders.
• · Consideration: While offering benefits like unlimited growth potential through stock sales, C Corporations may face higher overall tax burdens due to double taxation.

Strategic Considerations:

• · Future Goals: Align your entity choice with long-term objectives, such as expansion plans or exit strategies.
• · Tax Efficiency: Regularly review your business structure to ensure it remains the most tax- efficient option as laws and business circumstances evolve.

In conclusion, implementing strategies like PTET and carefully selecting your business entity structure can significantly impact your tax obligations and financial success. Given the

complexities involved, it's advisable to consult with tax professionals to tailor these strategies to your specific business needs.

For personalized tax planning and advisory services, consider reaching out to South Bay Tax Solutions, experts in strategic tax planning for businesses.