Small businesses in the United States are getting crushed by high taxes. Every time you turn around, your city, state and Federal government have their hand out. Here’s how to cut your corporate tax rate from 40% to 4% overnight guaranteed without leaving the U.S.
The IRS defines a “small” business as any venture with less than $10 million in gross receipts. A business can be an individual, partnership, corporation, S corporation, or any other structure.
According to US government data, small businesses make up 99% of all American businesses. Roughly 68% of small businesses (about 16 million) are individuals filing a personal return with Schedule C. The remaining 31 percent (about 7.3 million) are partnerships, corporations, or some other form of entity.
Small businesses with at least one employee (not including the owner) make up only 20% of the total population but about 71% of the total small business taxable income. So, it’s small businesses with one or more employees that drive the US economy.
These businesses may drive our economy, but they don’t get the respect or help they need from the IRS. A 2015 study of calls to the IRS from small business owners found that only 37% of calls received were answered. Of those, only about half were given an answer to their question. That means only 7% of total inquiries from small businesses that are trying to comply with the tax laws were actually helped.
That’s unsettling considering small business returns accounted for more than 93% of all business tax returns filed. Our tax rates are out of control and, when we try to do the right thing, we can’t get the answers we need.
This article on how to cut your small business tax rate is focused on small businesses with about $800,000 in net profits and at least 5 employees. The tax strategy I will propose will require a minimum of 5 employees.
It probably doesn’t make economic sense to implement this strategy with net profits of less than $800,000. Though, this is an arbitrary number and you might find it worthwhile at $500,000 depending on your circumstances.
- If your net is closer to $300,000, you might read through my article Move Your Internet Business to Cayman Islands Tax Free.
Here’s now I get to a typical corporate rate of 40% in the US and how to cut it to 4%. The average effective tax rate on small businesses in the United States is only 19.8%. We reach this by including all the self employed and Schedule C businesses out there.
Removing the very small businesses from the calculation, let’s focus on those making real money. What would a business in California pay on net profits of $1 million? Let’s say the entire amount comes out as salary, so there are no double tax or complicating factors.
An individual who took out $1 million in salary would pay $354,000 in taxes to the IRS, or about 35.4%. This assumes no itemized deductions.
That person would also pay another $109,000 to California in income taxes and $29,000 in FICA.
And we’re not done yet. Your company will also pay about 7% in payroll taxes, for another $70,000.
This gets us to a total of $562,000 in taxes on $1 million in salary. And I haven’t considered the various Obmamacare taxes and California’s 1% surcharge on incomes over $1 million
What if I told you I can get that number down to $61,869 immediately on net profits of $1 million for an effective rate of 6.2%?
Then what if I told you I can get that number down to $341,869 on net profits of $8 million for an effective rate of 4.2%?
What would you do to immediately improve your bottom line by about 52%? Would you be willing to work and make major changes to your operations to get that tax rate?
If the answer is yes, read on…
Remember above I said you don’t need to move your business out of the US. That’s true. You do need to move your company to the US territory of Puerto Rico to get this tax savings. I know that can be hard, but we’re talking about immediately improving your profits by 52%. Of course it’s hard or everyone would be doing it.
The offer is relatively simple: Set up business in Puerto Rico that offers a service to persons or companies outside of Puerto Rico and hire at least 5 employees. Do this and any profits your business generates from Puerto Rico will be taxed at 4%. Any income that can be attributed to the work done in Puerto Rico will qualify for this 4% tax rate.
You, the business owner, will need to take a fair salary for the work you do. I’ve assumed this to be $100,000 in the calculations above. Wages are taxed at 25.87% in Puerto Rico (click here to run the numbers). 25.8% tax on your salary of $100,000 + 4% on the remaining profits of $900,000 get me to $61,869.
The Puerto Rico company can offer just about any service you can come up with. Common examples are internet marketing, call centers, sales centers, import / export, management of investment funds, hedge fund offices, etc.
If you move only your business to Puerto Rico, and you stay in the US, you can defer US tax on Puerto Rico sourced income. When you take out those profits as a dividend, you’ll pay US tax on the distribution.
If you move you and your business to Puerto Rico, become a resident by spending at least 183 days a year there, buy a home and fulfill other terms, you can take out your profits from the Puerto Rico company tax free. That is to say, the ONLY tax on Puerto Rico sourced income will be 4%. Net profit after your salary and 4% corporate tax will be distributed to you tax free.
Also, as a resident of Puerto Rico, you can be one of the 5 employees. In fact, any US citizen who spends at least 183 days a year in Puerto Rico can be a qualifying employee.
To sweeten the deal, Puerto Rico will give you a zero percent tax rate on capital gains earned on assets acquired after you move to the island. It’s difficult to find a tax rate lower than zero!
If you would like to compare this offer to the Foreign Earned Income Exclusion and offshore tax planning, please see my article Puerto Rico Tax Deal vs Foreign Earned Income Exclusion. Keep in mind that when you move offshore the US will tax your capital gains and passive income. Because it’s status as a US territory, only Puerto Rico can offer you a deal on capital gains and dividends.
And here comes the coupe de gras: Puerto Rico will give you a 20 year guarantee on this tax holiday. So long as you operate your business from the island and employee 5 people, you will pay only 4% on your Puerto Rico source income.
Combine this guarantee with the fact that your cost of operation will be about 30% lower in Puerto Rico than in major cities in the United States, and you’ll see that the Territory is making an offer you can’t refuse.
I hope you have found this article on how to cut your small business tax rate from 40% to 4% to be helpful. To learn more, you might also read How to Maximize the Tax Benefits of Puerto Rico.
Please contact me at firstname.lastname@example.org or call (619) 550-2743 for a free and confidential consultation on how to move your small business to Puerto Rico. I will be happy to personally work with you structure your business, to cut your tax rate, and improve your bottom line.