Texas has relatively business-friendly tax codes, but many business owners still can work to lower the company’s burden at both the state and federal levels. Several different measures may be helpful to meet this goal, but business restructuring often should be at the top of this list.
Restructuring involves reorganizing legal, operational, financial and ownership structures in an effort to minimize tax liability and maximize legal benefits like incentives and deductions.
Five options to explore
The needs of each business are unique, but one or more of these strategies may apply:
- Change the business’s federal income tax status: The company’s tax reporting status (which is tied to its legal structure) significantly impacts the tax liability. The ability to take deductions is different between partnerships and corporations. LLCs can be taxed as either partnerships or corporations. Understanding the particulars can lead to significant tax savings.
- Use tax advantaged structures for major transactions: It makes sense for transactions like mergers and acquisitions to employ structures that reduce or defer taxes. The rules and regulations are complex, and compliance is essential, so it is wise to work with an attorney with a background in tax law.
- Take advantage of incentives and tax credits: Governments at all levels employ incentives and credits to spur business. For example, there may be credits for research and development, energy efficiency, or a business’ location. These rules can change over time, so it is helpful to track the latest information.
- Isolate high-risk activities: It may make sense to spin off high-risk and high-payoff endeavors like research and development into separate legal entities to allow for certain tax advantages. Separating them could also protect the main business from certain risks or liabilities.
- Reevaluate deductions: Tax codes change, and so do businesses. Carefully reviewing potential deductions can yield tax savings. Areas to look at include office rent, marketing, equipment purchases, employee pay, and other parts of regular operations.
Tax codes are complicated
The U.S. Tax Code is over 1 million words in 2023, which is longer than the King James Bible or War and Peace. Owners and managers are busy enough with running companies, and mistakes can be a severe setback, so it is wise to discuss tax questions related to business restructuring with attorneys who handle business and tax law.