Tax Advantages of a Corporation
There are several tax advantages available to corporations, to get the most out of these advantages you should speak with an attorney or tax professional to set up a tax structure that works for your business.
- Medical insurance for families may be fully deductible.
- Retirement plans, such as a tax-deferred trust can be set up as fringe benefit and may be tax deductible for the corporation.
- Losses are fully deductible for a corporation, whereas an individual running a sole proprietorship must prove there was a profit motive before deducting losses.
- Profits can be left in the corporation for further expansion of the business, and this could have tax advantages.
With a corporation, only salaries (and not profits) are subject to self-employment, or similar, taxes. This can save you thousands of dollars per year if salaries and profits are structured properly.
Corporate Taxes and Small Businesses
Many small business owners take all profits out as salaries to avoid double taxation and state corporate income tax. However, there are rules requiring that salaries be reasonable. If a stockholder's salary is deemed to be too high relative to his or her job, the salary may be considered to be partially a dividend and subject to double taxation.
Leasing Assets to Your Corporation
Leasing assets you own to the corporation is a tool many people use to reduce their overall tax liability. For example, leasing your personal vehicle to the corporation isn’t uncommon. 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 certain costs, such as maintenance and repairs, on your taxes. 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, not specifically for your corporation.
- 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.