Income Shifting
Although C corporations are subject to double taxation, they also offer greater
tax flexibility. In a C corporation, you can use income shifting to take advantage
of lower income tax brackets.
To illustrate, let's use an example of a company that earns $100,000. With a sole
proprietorship, a business owner who is married and filing jointly would be in the
25% income tax bracket. With a corporation, assume the business owner takes $50,000
in salary and leaves $50,000 in the corporation as corporate profit. The federal
corporate tax rate is 15% on the first $50,000. Furthermore, the business owner
is now in the 15% tax bracket for his or her personal income tax. This can reduce
your overall tax liability by over $8,000.
Fringe Benefits
A corporation can provide corporate retirement and medical plans, as well as greater
retirement and life insurance contribution limits than unincorporated entities.
Consult with an accountant or tax advisor when establishing an employee benefit
package for your corporation.
Business Losses
In a corporation, there are no limits or restrictions on the amount of
capital or the operating losses that a corporation may carry back or forward to
subsequent tax years. Unincorporated entities, however, are subject to more stringent
rules regarding corporate losses. For example, a sole proprietor cannot claim a
capital loss greater than $3,000 unless he or she has offsetting capital gains.
Leasing Assets to Your Corporation
Leasing assets to the corporation is a tool many people
use to reduce their overall tax liability. When you lease assets to a corporation,
the business pays a lease or rental fee and you claim the rental income. Doing this
allows you as the lessor to deduct acquisition interest, depreciation, repairs and
maintenance, insurance and administrative costs.
The requirements for leasing assets to your corporation are as follows:
You must draw up a formal, valid lease agreement. You should treat the leasing
agreement as you would with an unrelated party.
The rental amount you establish must be fair. In other words, you can't charge
anything you want. It has to be reasonable and in line with what's being charged
for similar assets in your area.
Self-Employment Tax Savings
Earnings from a sole proprietorship are subject to self-employment taxes,
which are currently a combined 15.3% on the first $106,800 of income.". With a corporation,
only salaries (and not profits) are subject to such taxes. This can save you thousands
of dollars per year.
For example, if a sole proprietorship earns $80,000, a 15.3% tax would have to
be paid on the entire $80,000. Assume that a corporation also earns $80,000, but
$40,000 of that amount is paid in salary, and $40,000 is deemed as profit. In this
case, the self-employment tax would not be paid on the $40,000 profit. This saves
you over $5,000 per year. Please note, however, that you should pay yourself a reasonable
salary.
To take advantage of all the potential tax benefits of a corporation, incorporate
your business online today. Come tax time next year, you'll be glad you did.
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