BUSINESS TAX CONTROVERSIES, TAX DISPUTES & TAX LITIGATION

The Atlanta tax attorneys as well as the Atlanta Business Attorneys at The Adams Law Offices are always informing, educating, and assisting individuals and business owners about incurring taxable income (tax liability) without the liquidity to pay taxes on this income. This scenario can be a taxpayer’s worst nightmare and often generates significant internal struggles, infighting, and conflict between business owners. The Atlanta business lawyers and Atlanta tax lawyers at our Firm refer to the scenario of incurring tax liability without producing the liquidity to pay these taxes as “phantom income.” “Phantom income” means you have taxable income but no cash to pay taxes on this income.

“Phantom income” occurs most frequently in Subchapter S corporations and limited liability companies (LLCs), which are presently the most common and popular business entity form for doing business in Georgia. This is especially true in small businesses owned by taxpayers who may not be aware how “phantom income” can be incurred or what “phantom income” is.

“Phantom income” occurs when Subchapter S corporations and LLCs are taxed. The income in these business entities is passed to the owners whether or not cash is actually distributed to the owners. Moreover, if a business makes a profit, at least for tax purposes, but the business owner(s) keeps most of the money in the business as so often is the case (especially in small businesses), then a “phantom income” scenario can result.

For example, suppose your business has a tax profit of $100,000, but you only distribute $10,000 because you need the rest of the money in the business to keep operating the business. However, you are taxed on $100,000 even though you only received $10,000. This is one instance where you have been the unknowing casualty of “phantom income.”
Thus, the question arises: How do you avoid phantom income? The answer is the proper drafting and prudent use of a well-crafted operating agreement.

Continue reading "ATLANTA TAX LAW FIRMS AND LAWYERS AND ATLANTA BUSINESS LAW FIRMS AND LAWYERS -- BEWARE OF “PHANTOM INCOME” IN YOUR CLIENT’S LIMITED LIABILITY COMPANY (“LLC”) OR “SUBCHAPTER S” CORPORATION " »

Posted by Duncan H. Adams and Michael K. Sapp | Permalink | Email This Post

Posted In: BUSINESS LITIGATION & DISPUTES , BUSINESS TAX CONTROVERSIES, TAX DISPUTES & TAX LITIGATION , BUSINESS TAXATION & TAX PLANNING , EMPLOYMENT LAW

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A business owner pays approximately 16% of his or her salary in payroll tax. The payroll tax is in addition to federal and state income tax. For example, if you pay yourself a salary of $75,000, the payroll tax is approx. $12,000, plus federal and state tax.

Here’s a tip on how to save on payroll taxes. Suppose your business earns a profit of about $75,000 per year. So you pay yourself a salary of $75,000. Your payroll tax is approx. $12,000. If you were operating your business as an “S” corporation, which many small business owners do, then you need to know that distributions of profit from an “S” corporation are not subject to payroll tax.

Instead of paying yourself a salary of $75,000 (all of which is subject to payroll tax), pay yourself a smaller but reasonable salary of say $25,000. Thus, the payroll tax is approximately $4,000. The other $50,000 is distributed to you as an “S” corporation dividend. There is no payroll tax on the $50,000 distribution. That’s a tax savings of approx. $8,000!!!

The same technique can be used for a limited liability company ("LLC"), but it’s a little more complicated. You pay yourself a salary and pay payroll tax on that amount. But there is no payroll tax on an LLC distribution of profit as long as you are not the LLC’c member. Most people either interpose another LLC (owned by you) as the member of the operating LLC, or for example a spouse who does not work in the business is the member of the operating LLC.

Be smart. Sometimes less really is more. But also be reasonable when using this technique. The Adams Law Offices offers experienced business and tax experts to assist you with every aspect of owning and running a successful business.

Posted by Duncan H. Adams and Michael K. Sapp | Permalink | Email This Post

Posted In: BUSINESS TAX CONTROVERSIES, TAX DISPUTES & TAX LITIGATION , BUSINESS TAXATION & TAX PLANNING

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