Avoiding Double Taxation for Small Business Assignment Essay:
Double taxation is an even where the business profits are taxed at both the business and personal level. In Minnesota, any business entity must submit the income tax before paying the dividends to the shareholders. Then the dividend to shareholders is subject to income tax deductions. In our case, since twelve members of the same family own the business, the business can easily be able to avoid double taxation easily.
Including the family members on the business payroll:
Family members can be included in the business payroll as long as they are legitimate employees in the business. In this case as long as the business adheres to the child labor laws, even children can be included in the payroll and their entries can be made for doing odd jobs. This is an appropriate action in the case where the business wants to keep the business owners tax bracket at a lower level (Feinschreiber & Kent, 2000).
Accumulating the business earnings:
When profits are ploughed back into the business entity, the business can be able to avoid double taxation. This is because tax can only be applied to dividends but not the profit retained in the business. Though this is a good option, the management must avoid accumulating too much profit, as this can attract Accumulated Earnings Tax. This is a restriction that was put up to avoid businesses from avoiding income tax. In this scenario, profit retention must be for re-investment purpose only.
Paying owners a salary:
The law allows owners and business directors to be paid a salary. A business gets to write off the salary expense, which in turns reduces the overall tax, and the same is taxed on the personal income of the salaried owners. So far this is the best way to avoid business tax as long as owner’s salary can be justified.
When the owner borrows money from the business, the dividend reduce and hence the tax on dividends. The amount of money borrowed by the owner is not subject to tax. The law allows the owners of the business to borrow from the same as long as they do not create a large tax liability. Care must be taken in this case since the law requires the owner to pay back the money within the required time plus a reasonable interest rate must be applied. Else, it is treated as dividend.
Feinschreiber, Robert, & Kent, Margaret. (2000). Avoiding tax malpractice. Chicago: CCH Inc.