Tax Advantages of Incorporating

Posted: 21 Aug 2008 | Categories: Taxes

Operating a corporation form of business is much more advantageous than to the other forms like sole proprietorships. The tax and legal system provides several benefits and relative immunity specifically to the corporations and their owners.

Among many of the major and minor tax advantages, you will find the following as most relevant and useful for your own business corporation.

Owners at Ease with Business Liabilities: A Legal Protection

The biggest advantage of operating a corporation is a legal shield provided to its owners from their business related liabilities. Majority of the corporation owners prefer this legal protection. A corporation has its own locus standee in terms of both legal as well as the taxation. Separation of legal and tax entities enables a corporation for incurring debt and liabilities related transactions as an independent business entity. As a result, the owner remains free from the liabilities and enjoys relative immunity from the business debt.

Such type of business arrangement becomes very crucial if it is a risky venture involving various types of legal and tax complications. It is also equally pertinent if the owner of the corporation is wealthy as well.

However, the protection under law is not limitless and becomes open to all such applications when the lender makes it mandatory to possess a guarantee of the corporate stakeholders against any corporate debts.

Tax Deductions with Fringe Benefits

Tax advantages related to the fringe benefits are a plenty for a corporation. Various types of tax deductions can be availed favouring the business, employees, and family members of the owner. The benefits are equal even if you are the sole stakeholder in the business.

Miscellaneous tax advantages available to all include health insurance, life insurance, travel insurance, entertainment expenses, and several others. There are specific deduction slabs that could be advantageous for everyone in your business. For instance, business corporations have been allowed to deduct 100% medical insurance premium paid.

Another intelligent move would be to remove the self-employment tax cap and by reducing the investment in “Social Security Tax” along with the “Medicare Tax.” Individual’s tax liability thus also is reduced this way and you become an employee of your own corporation.

Deriving Tax Deduction Benefits with Business Losses

Business losses incurred, if any, also come under the purview of tax deduction benefits and give you a safe hand. There are no upper ceiling limits for incurring business, capital, and operating losses. Meaning thereby, you can freely carry forward or carry back your losses to the previous as well as the subsequent tax-years.

On the contrary, the business entities that are not incorporated legally have to face far stricter provisions and do not enjoy limitless transitions of business and corporate losses. For instance, in case of a sole proprietorship business entity the owner is not permitted to claim a tax deduction for a business loss incurred for more than $3,000 if there are no offsetting capital gains.

Sharing and Shifting Income for Tax Benefits

Among other benefits of incorporating, the ‘Income Sharing’ is an important factor. In simplest terms, it is an act of dividing the income among the business, the corporation, and its shareholders. An intelligent tax consultant would design this division in such a way that the overall tax liability automatically comes down substantially.

For an individual who is running a small-scale business but its stakeholders are falling into the higher tax brackets this type of income classification is extremely helpful.

In case of the corporations having less than 100 employees on their payrolls would not attract the corporate tax rates implications. Here the business profits are generally paid out already in forms of tax-deductible salaries and other fringe benefits to the employees.

However, no business would prefer to pay out its complete business profit in such a way. It is never a better option for a small corporation. Substantial part of the profit proceeds would be required for further expansion of operations and increasing the product line. An increased investment may also be required to invest in the advertising. For all such future investment plans, the profits retained would attract a tax at an initial rate of 15% only.

This way a business corporation can easily retain its earnings with itself and that too without transferring any tax liability to its stakeholders. Because of this very tax advantage, we are observing an exponential growth with upcoming new corporations.

Taking Benefits of Dividends Received Exclusion

If you are lucky, enough to run a cash-rich corporation and your shareholders are not inclined to withdraw any cash assets you can surely take an advantage of “dividends received “exclusion. It is extremely beneficial for your business.

The tax burden is relaxed almost by more than half even. For example, an individual receiving corporate stock dividend otherwise would have to pay tax for all of its value would be required to pay even less than half of its value if the corporation is falling under the “dividends received” exclusion category.

Tax Saving Strategy with Assets

Substantial tax savings can be availed for movable and immovable assets acquired. A corporation may acquire a leasing real estate, an automobile, and many other properties and assets. As a business owner, your own assets would also be covered under corporation umbrella and you can avail of the tax savings.

This tax saving strategy is almost similar in nature with the income shifting. However, it is not free from in-depth scanning and scrutiny by the tax authorities. You must be very careful while adapting to this measure and any action taken therein must be in consultation with an experienced tax consultant or attorney.

DIY Finances: Financial Responsibility.

Alexander_Glaser