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Nobody likes paying taxes, and it makes sense to do what you can to minimize your overall tax burden as long as you aren’t violating any laws. If you are a business owner or are thinking about becoming one, you will want to determine if your business is a tax shelter. A tax shelter business is any business that reports losses, which helps offset taxes. Not surprisingly, there are a lot of rules and regulations in place regarding tax shelters, so you need to make sure you are dealing with everything correctly.
When discussing tax shelters, you need to keep in mind that while the term is often used with a negative connotation, there is nothing illegal or immoral about using them. Tax shelters are an intentional part of the IRS tax code. Most people would consider it foolish to intentionally pay a higher tax rate than is required by the IRS. Taking advantage of the various tax exemptions and rules makes sense for both individuals and businesses.
Gross Receipts Exception
Businesses are typically limited on the amount they can deduct when it comes to interest expenses. There are, however, a variety of exceptions in place that will allow a business to deduct a greater amount in certain situations. One of the most significant exceptions to deduction limits is known as the gross receipts’ exception (IRC Section 163(j)). This only applies to tax shelters that have an annual gross receipt that averages less than $25 million over the past three years.
Ownership Structure
According to IRS Section 461(i)(3)(B), a tax shelter will include businesses that are defined as partnerships, S-Corporations, and other entities as long as more than 35% of the annual losses are allocated to limited partners/investors. Limited partners or investors are those who have ownership of a portion of the business, but don’t participate in the management of the business. These types of owners are commonly called silent investors. As a tax shelter, a business would still be subject to the interest expense limitation rules (163(j)) no matter what gross receipts they have.
Complicated IRS Rules
The IRS rules governing tax shelters are very complex and nuanced, which is why so many businesses fail to properly take advantage of them. Whether you think that your business is a tax shelter or not, it is best to have an experienced tax attorney review your situation and make recommendations on how you can best keep your overall tax burden to a minimum. Please contact us to schedule a consultation and get the help you need.
Weisberg Kainen Mark, PL
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