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Incorporation

4. Tax Advantages of Corporations

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.

Incorporate your business today

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.

You may be eligible to set up a lease with your corporation if you meet the following criteria:


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 13.3% 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 13.3% tax would have to be paid on the entire $80,000. Assume that a corporation also earns $80,000, but $35,000 of that amount is paid in salary, and $45,000 is deemed as profit. In this case, the self-employment tax would not be paid on the $45,000 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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