The tax code engages in social engineering. It encourages or discourages certain kinds of conduct by awarding or taking away different tax benefits. A landlord, for example, even a very active landlord, generally does not pay social security taxes on the taxable income from renting his properties. But across town, a property manager who every day does almost exactly the same things as the landlord, does have to pay social security taxes on that same income. Plus there is a third kind of landlord who rents his properties out with triple net leases where the tenant pays all repairs, taxes, etc. His income might have to be treated as portfolio income, with an even different set of tax consequences. For different situations, any one of these situations might be best for you. But you need to know and understand the differences, hopefully well in advance.
Remember that if you have your own business, if you do many different things, if you are an active investor, etc., there are opportunities and choices open to you that are not available to most persons. The key to effective tax planning is to, in advance, structure your business dealings for good business reasons, in ways that fit best with what the tax code says it would prefer (where it offers the most benefits).
It usually isn’t all that hard, but it does require you to have a basic understanding of the alternative ways one might do business, and why the liability and tax effects might be different for each one.
