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Basic Tax Considerations: Bulletproofing Your Deal 

June 30, 2023
Basic Tax Considerations: Bulletproofing Your Deal 

Taxes – they will be a reality no matter what your deal might be or what type of business structure works best. While there is no way to provide comprehensive tax guidance in a blog post, a few pointers can go a long way toward eliminating potential hurdles that might trip you up. In this post, we will discuss a few key things to keep you on the straight and narrow when tax time rolls around. 

Employer Identification Number 

One of the most critical steps is to obtain a tax ID – your employer identification number, or EIN. Thankfully, it’s not difficult to do and you won’t even need an attorney’s assistance here. To start, you’ll just need to visit the IRS website. Follow the steps and it’s possible to submit your application online.  

Of course, it’s rarely as simple as it could be. Below, we’ve listed a few important tips to help minimize the amount of stress you face during this process. 

  1. You cannot claim to be a third party during the setup process (which is why you don’t need to work with an attorney here – only an owner or management member of an LLC can complete the application). 
  2. The EIN application process defaults to LLCs with multiple owners as partnership taxation. Make sure to choose the right business formation type (Form 2553 is to be treated as an S Corp and 8832 is for C Corps).
  3. Remember that you cannot do a single-member LLC as a partnership because it defaults to partnership taxation. That erodes the tax liability protection you need from a disregarded entity.

Ultimately, every entity must have a current tax ID unless it’s a disregarded entity. The questionnaire the IRS provides might not be the simplest thing to understand, but it does guide you through the process – just follow it step by step. 

Fiscal Years 

99% of businesses choose that their taxes be calculated on a calendar year. Most people think the end of the year is December, but that’s not a requirement. Some companies and clients say we don’t follow the calendar quarter; we follow this other calendar period.  

A fiscal year is just a 12-month accounting period. It does not have to follow the calendar year – it can be June through May if that works best for your needs. The only requirement for a “fiscal” year is that you have 12 sequential months so that your accounting team and the IRS can accurately measure revenue and earnings from one year to the next.  

Note that the IRS allows you to use either a fiscal year or calendar year tracking system, but not both. 

Tax Categories/ Tax Allocations 

Tax allocations are highly contested when putting a deal together because there’s no single way to approach it. Sometimes you’re just looking for a partnership, the capital account balance. If you’ve never understood a capital account, it’s like an internal account in which profits are allocated. Losses and expenses get taken away from it, and you ultimately end up taxed on whatever this capital account holds. It’s affected by depreciation and other non-cash accounting items. Other clients will prefer to follow the money, so it makes sense to differentiate the two.  

Let’s pretend you’ve structured your investment to have a preferred return and then a share of profits. If you’re saying just follow the money for tax purposes, for IRS purposes, investors are shown as getting 100% of all profits. This may or may not be the case, but that’s how the K1s end up looking. This method focuses on purely paying attention to the cash flow rather than the tax effects of the depreciation, where the capital account balances follow everything. 

For C Corps and REITs, all we care about are the dividends because the C Corp must handle its taxes, and then the only difference is the dividends that go to the shareholders. It’s important to understand that there are standard ways to handle tax allocations. Every year to two years or major tax update, you must take all your forms and give them to your tax attorneys.  

The goal here is to have a tax attorney look at your financial data and what the organization does, and then ensure it is presented the right way, that your investors are being taxed appropriately, and that the allocations make sense. Yes, you can do this yourself, but it’s always better to leave it in the hands of an experienced tax attorney. This applies when you’re buying properties, but also when you sell one and you must deal with the fallout of taking depreciation over time and showing capital gains.  

In Conclusion 

Everyone must deal with taxes at some point. No matter your business formation type or the number of deals you’ve done, the IRS will be there. You must work with an experienced tax attorney who understands your business, its goals, and tax-reporting best practices.  

Of course, it also helps to have the right business structure in the first place and to work those deals correctly from the very beginning. Contact Crowdfunding Lawyers today to schedule your consultation and learn how we can help improve your odds of success. 

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