Tax Efficiency Grader

Tax efficiency is the legal, legitimate practice of minimizing your tax liability by fully using deductions, credits, and entity structures that the Internal Revenue Code explicitly provides. It is completely distinct from tax avoidance (aggressive schemes) or evasion (illegal). Tax efficiency includes choosing the right entity, optimizing your S-Corp reasonable-salary/distribution split, maximizing 401(k) and SEP IRA contributions, claiming Section 179 and bonus depreciation, and using the R&D Tax Credit under IRC Section 41, all intended uses of the US tax system. IRS guidance supports these practices.

The tax efficiency grader scores a business owner's tax setup across 10 optimization criteria, entity structure, S-Corp salary split, 401(k) contributions, Section 179, R&D Tax Credit, and more, and identifies specific gaps. CPAs, tax advisors, and fractional CFOs embed this grader on their website to give business owners instant tax setup feedback while revealing their income level, entity structure, and tax maturity as a qualified lead for tax planning, accounting, and restructuring services.

Above 70 means you are making most of the available optimizations and likely working with a proactive CPA. Between 40-70 suggests 2-4 significant gaps typically worth $2,000-5,000 in annual savings. Below 40 means major restructuring opportunities, most businesses in this range could save $5,000-15,000+ per year with professional tax planning. The IRS Data Book reports that small businesses collectively overpay billions per year by missing deductions and credits.

An S-Corp election on an LLC typically becomes tax-efficient once net profits exceed $40,000-60,000. A sole proprietor pays 15.3% self-employment tax (FICA) on 100% of net earnings, on top of federal income tax at 22-32% and state tax. An S-Corp owner pays FICA only on the reasonable salary portion, while distributions avoid self-employment tax, often saving $2,000-8,000 per year. However, S-Corps add compliance costs ($750-$2,000 per year for Form 1120-S and payroll), so the savings must justify the overhead.

The R&D Tax Credit under IRC Section 41 (worth up to 10% of qualifying costs, most eligible small businesses never claim), Section 179 deduction timing (placing equipment in service the wrong side of year-end), 401(k) and Solo 401(k) contributions (most owners underuse by $10,000-30,000 per year), home office and mileage deductions, Qualified Business Income (QBI) Section 199A deduction, and spouse/child income splitting. Collectively these are worth $5,000-20,000 per year for the average S-Corp owner.

Small businesses that work with a tax advisor save an average of $3,000 to $12,000 per year through entity optimization, retirement contributions, and deduction maximization according to the National Association of Tax Professionals. The most commonly missed deductions are home office, vehicle expenses, and health insurance premiums for self employed individuals.

It evaluates cash flow forecasting, profit margin tracking, accounts receivable management, tax planning, budget vs actual review, emergency fund, debt management, pricing strategy, financial reporting frequency, and advisor relationships.

You answer 10 questions about your business finances covering transactions, revenue, sales tax, payroll, expenses, tax planning, compliance, structure, growth, and time spent on admin.

Sole proprietorship is simpler and cheaper.

Debt-to-equity ratio is total debt divided by total equity, measuring how much of a business is financed by borrowing versus owner investment.

Company details, unique invoice number, itemized services with quantities and rates, tax calculation, payment terms, due date, and ACH or bank transfer details.