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by Shawn M. Casey, Esquire When you do business in your own corporation, you open up a whole new world of opportunities for increasing your net profit through proper tax planning. The corporation will also protect you from personal liability for problems involving corporate assets or employees. The corporation has been called the “Ultimate Tax Shelter” and the “Last Way Left for the Little Guy to Get Rich.” When you realize that all the tax advantages available to the big guys, i.e., IBM, GE, etc., are now available to you for your small business, you have to be excited about the possibilities.
The first reason to incorporate is to avoid personal liability. The corporation was originally conceived to provide business owners with protection from liability. The idea was to encourage people to create and grow businesses by eliminating some of the risk of personal loss. Risk is something we all face in our businesses. The proper analysis and reduction of risk allows us to prosper without fear of losing everything. If you structure your affairs properly, you can make it virtually impossible for any lawsuit to seriously hurt you. The owners of the corporation are the shareholders. It doesn’t matter how many shares you own. Your percentage of the total shares issued by the corporation determines your percentage of ownership. Shareholders are not liable for corporate activities. If an employee causes an accident, the victim can obtain a judgment against the corporation, but not against the shareholder. If an employee becomes disgruntled, he can obtain a judgment against the corporation, but not against the shareholder. If someone is injured on corporate property, the result is the same. If the corporation is sued, the corporate assets are at risk, but the shareholders remain safe and secure. As long as the corporation is properly run, the shareholders are not at risk. The second reason to incorporate is the available tax advantages. As the Internal Revenue Service and Congress developed the tax code, two methods of taxing corporations were created. Depending on your choice of tax treatment as a “C” corporation or an “S” corporation, you can alter the level and effect of taxation. With proper tax planning, you can greatly reduce your income taxes and dramatically increase your net income. You’ll find a further explanation of tax advantages below. The third reason to incorporate is to avoid being designated as a real estate “dealer” by the Internal Revenue Service. If you are a real estate investor who buys real estate with the intent to sell (property you
however. you must report the total amount of the sale and pay the full amount of tax due. you have the option to dissolve the corporation and start a new one. The problems with being classified as a dealer are: 1.000 down payment. Some of the primary advantages of Nevada are: .000 you received from the purchaser. escrow the net proceeds. To avoid being classified as a dealer. If the corporation is classified as a dealer. Section 1031 allows the owner of investment real estate to sell his property. You cannot depreciate any real estate. “How To Never Pay Taxes When You Sell Real Estate”. You cannot defer the tax due on the sale of a property by using tax deferred exchanges under Section 1031 of the Internal Revenue Code. 4. purchase additional investment property and avoid paying part or all of the income tax which would otherwise be due. you report your rental income on Schedule C.3% of your net income as additional taxes over and above your income taxes. even if you have not yet received the money. including long term investment property. How Do You Get Started? The first step to incorporate is to choose the state of incorporation. 2. You have two basic choices — the state in which you live or Nevada. when you sell a property and receive payments in lieu of the complete purchase price. you can choose to report the money you receive as income only when you actually receive the money. Then. then you could actually owe more income taxes than the $5. For more information on tax deferred exchanges. Schedule SE is the schedule used to figure your self employment income tax. Without the option to elect the installment method of reporting.“flip” or “quick turn”). The individual can continue to report his rental income on Schedule E and receive the appropriate tax advantages. If you sold a property for $50. 3. Instead of reporting rental income on Schedule E of your personal tax return. You should be aware. This alone is usually a good reason to form your corporation in that state. This greatly increases your taxable income. You will obviously be doing business in your home state. The corporation’s tax status is usually not affected by the classification as a dealer because the penalties for being a dealer do not hurt the corporation when it simply buys and sells real estate. savvy real estate entrepreneurs buy and sell real estate through their corporations. the Internal Revenue Service can choose to classify you as a dealer. that more corporations are formed in Nevada than in any other state. the individual is not affected. You will pay up to 15. Usually. please refer to the Special Report titled. You cannot elect to use the installment method of reporting the sale of real estate.000 with a $5. Nevada’s laws provide more privacy and protection for the shareholders than any other state. you report the net income from Schedule C on Schedule SE. If the corporation’s tax status is hurt by being classified as a dealer.
the shareholders elect the directors to the board of directors. Nevada allows the articles of incorporation to eliminate any liability of the directors. With the proper information. You are required to hold annual meetings of the shareholders and directors. one person (you) can act as all three officers. you can handle all the required tasks yourself. You can use one of several incorporation services which will file the necessary documents for you. As the owners of the corporation. An attorney will charge from $200 to $400 to complete the minutes of these meetings. You can also just have one director on the board of directors in most states. 2. If the shareholders’ names are not included in the filed information. The directors and officers serve a one year term or until their successors are elected. After you have filed your incorporation papers. Certainly. Many people wonder if they can handle this task themselves or if they should hire an attorney. Once you have completed these meetings and filed the appropriate information in the corporate record book. you can hold these meetings and complete the meetings yourself. An attorney will charge from $500 to $750 plus the cost of the state filing fees. You can form your Nevada corporation without ever going to Nevada. You will need to determine who will serve as the officers and directors.1. and other such matters at the initial meetings. Nevada does not levy any corporate or individual taxes. These services will also act as the required registered agent within Nevada. articles of incorporation. What Are Your Tax Options? The Internal Revenue Service automatically treats every corporation as a Subchapter “C” corporation. In addition to electing the officers and directors. In other states. you have finished the process of incorporation. The directors then elect the officers. the directors can be held liable to outside parties and to the shareholders. The corporation is required to have three officers — a president. Forming and running your own corporation is fairly simple. In most states. 4. Nevada does not require the shareholders to be disclosed. then no person can discover them from the public information. Nevada is the only state which does not have an information sharing treaty with the Internal Revenue Service. Many people choose to incorporate in Nevada to take advantage of these laws. Most other states have corporate income taxes. you will hold the initial meetings of the shareholders and the directors. but assures you that everything is done just the way you want it. Other states share your personal and corporate income information with the Internal Revenue Service. stock certificates. Doing it yourself provides you not only with a significant cost savings. a secretary and a treasurer. you can file the correct documents with the state and complete all the corporate documents yourself. you will authorize and approve the bylaws. . 3. If you have the right information available. franchise fees or both.
In one specific situation.The shareholders can unanimously elect to be treated differently. If you were doing business as a sole proprietor. An “S” corporation can only have one class of stock which must be common voting stock. This means a “C” corporation pays tax on its net income. Can You Choose the Tax Year Of the Corporation? After the 1986 Tax Reform Act. then you don’t have to worry about distributing the income until June 30th of the following year. you can pay yourself those profits as a bonus. an “S” corporation is generally required to have the same tax year as the shareholders (you). If you have either situation (a) or (b) above. A common choice is a tax year which begins July 1st and ends June 30th. A “C” corporation has no limits on the type of shareholders. you will have the opportunity to engage in this type of tax . you may want to choose a corporate tax year with a different ending. The losses will be reported on the shareholders’ tax returns and can offset other income. Another option would be to run your business as a “C” corporation with a tax year ending on June 30th. When you set up your “C” corporation correctly. This rate is sometimes lower than your personal tax rate. the shareholders pay taxes on the money anyway. you would have no choice except to recognize the income in the current year and pay taxes accordingly. the first $50. An “S” corporation files a tax return. A “C” corporation is a separate taxpayer. Since your tax year ends in December. You may have occasion to choose to leave profits in the “C” corporation. If profits are still undistributed as you approach the end of your tax year. You have the right to shift the income from the current year to the next year. For example. While this is true at the high income levels. but does not pay taxes. as a Subchapter “S” corporation. an “S” corporation is particularly useful — when you are starting a business and expect to lose a substantial amount of money for a few years. If the corporation has a net profit which it retains and does not distribute. Because the “C” corporation is a separate taxpayer. A “C” corporation can choose from twelve (12) possible tax years. you can make certain that the corporation never pays taxes by spending all the money each year. a partnership or an “S” corporation and you had (a) a large undistributed profit in December or (b) a large of sum paid to you as profit in December. The only requirement is the tax year must end on the last day of a month.000 of corporate net income is taxed at only a fifteen (15%) percent rate. you will have a variety of tax planning options available with the “C” corporation that are not available with an “S” corporation. An “S” corporation will have a tax year which begins January 1st and ends December 31st. the number of shareholders or the classes or types of stock. Many people think corporate tax rates are very high. Like you. The shareholders pay taxes on the net profits in accordance with their respective shares of ownership. An “S” corporation can only have 75 shareholders. much higher than individual tax rates. the “C” corporation has tax brackets so the tax rate increases as the income rises. If you are the owner of the corporation and an employee. at lower income levels the corporate tax rates are quite reasonable.
The first is to leave the money in the corporation and deal with it next year.000 of post-tax income left to pay your bills. you want to provide the best benefits available for the sole employee (you!). You have just $70.000 annually for medical insurance and expenses.000? The corporation can and does use the entire $100. The second is to pay the money out in expenses and bonuses to yourself. Proper tax planning can provide significant tax savings annually. This does not apply to an “S” corporation. the corporation will get a tax deduction for each expense. You can also provide some or all of these benefits when you have additional employees.000 in federal. In other words. Since you are going to pay expenses such as medical and automobile costs anyway. To really understand the huge benefit to you.000 instead of just $70. It is only available to you as an owner if your corporation is treated as a “C” corporation. you have two (2) choices. neither the corporation nor you will ever pay income tax on the money used by the corporation to pay benefits on your behalf. Your goal is to pay the least amount of income taxes and this setup will allow you to adjust to changing situations. When you personally are paid $100.000. Wouldn’t it be a lot better if you could pay your bills using the entire $100. If you are paying $5. The most important benefit you can provide is a Medical Expenses Reimbursement Plan. including elective surgery. you have to realize how pre-tax and post-tax incomes differ. pharmaceutical drugs. doesn’t it make sense for you to allow your corporation to pay them on your behalf and get the tax deduction? The medical reimbursement plan requires special language and documentation during the formation of the corporation. Please be advised that you can only provide yourself with a limited amount of tax deductible benefits if you don’t make them available to the other employees. You will make this choice based upon your specific situation. state and local taxes on it. While these are all expenses you would be paying anyway. You don’t get a tax deduction for medical expenses except for that part which exceeds seven and one-half (7. you can then pay yourself a salary on January 1st. these benefits are tax deductible expenses to the corporation. You would then determine how much money you should distribute to keep your income taxes as low as possible. This plan provides for the payment by the corporation of all medical expenses for the employee. his spouse and his dependent children. How You Can Get the Best Employee Benefits Available When you go to work for your corporation. If you leave the money in the corporation. wouldn’t it be great to have the government give you a break and contribute a little something to help. .000 as pre-tax income available to pay expenses. You have now shifted the income and the tax to the next year. co-payments. You could also choose to leave the money in the corporation until the end of the corporation’s fiscal year. and pay taxes in the current year.planning. but you have the money available to you personally now. and expenses not covered by insurance. deductibles. When the corporation provides medical or other benefits to you. The corporation will pay for medical insurance. You must set up the plan correctly to get the tax deduction.5%) of your adjusted gross income. you pay about $30. When the profit is still sitting in the corporation in December.
Educational expense deductions are readily available to corporations engaged in a particular business. It can pay for life insurance. In other words. Education is tax deductible for business purposes if you are maintaining or improving your skill in your current business. You must use the space solely for business. If the price of the vehicle is greater than about $15. gas. The corporation can pay the car payment. The Internal Revenue Service is so concerned with this deduction because they know many people exaggerate the space they use for business and the actual expenses. you are using 64 square feet.800 square feet). if you use an 8' by 8' foot room for your business. The home office deduction is also an item the Internal Revenue Service will always look at closely. catastrophic illness insurance and many other types of insurance. You can use 3. you have the opportunity to deduct the portion of your home’s expenses that correspond to the business use of your home. Your dining room table doesn’t count. An important exception to these rules is contained in Section 179 of the tax code which allows your corporation to deduct the full cost of any equipment purchases up to an annual total of $17. you first have to figure out how much space you use which is solely used for your office. you will only be deducting expenses like utilities. The corporation will receive a tax deduction for the business use percentage of all expenses. maintenance. How to Get Your Own Company Car Most self-employed people need a car or truck to carry out the work of the corporation. For example. oil.000. Education is not a tax deductible expense to the individual or the corporation if the education is for the purposes of learning how to invest in anything or for you to learn a new skill. insurance and repairs. Since you are already receiving a personal deduction for your home mortgage interest and your real estate taxes. The corporation will then receive a tax deduction for the expenses incurred. you usually can’t take a deduction for the full amount of the expense. To determine the percentage you can deduct. disability insurance. Even if you don’t take a deduction for the home office. If you work from your home. you can deduct the actual expenses associated with your business.55% of your house expenses as a business deduction. the corporation may not be able to deduct the entire cost of purchase. These include the usual business expenses as well as alterations or improvements necessary for your business such as telephone or electric outlets. The employee can use the car for personal as well as business reasons. You are required to amortize the cost of the asset over its useful life (normally 3 to 5 years). . For most people. You divide the 64 square feet into the total square footage of your house (we’ll use 1. long term care insurance. prior to incorporating. the home office deduction is more trouble than it’s worth. Your living room table doesn’t count.500.The corporation can provide additional insurance coverage for you. The Internal Revenue Service imposes limits on the price of the vehicle you can purchase. you should be certain to reimburse yourself. If you purchase expensive pieces of equipment such as a computer system. you incurred expenses such as education to improve your skills in your chosen business. the tax code allows you to do the obvious — get a tax deduction in full when you spend money now. If.
the trip is tax deductible. You could call an attorney and spend more than a thousand dollars just to get the corporation formed. If you combine business with pleasure.Travel the World in Tax Deductible Style As part of your business. you can call with him questions and pay him $3 or more for every minute you’re on the phone. it’s foolish to engage in business without a corporation. You might be visiting your son at college. You should incorporate as soon as possible.” Let me tell you – the $99 is just the beginning. You might. What’s Your First Step? You have several options for forming your own corporation. you will use the previous loss to reduce the profit. for instance. First. You could call one of those incorporation services that advertises “Only $99 To Set Up Your Corporation. When you put it all together. desire to travel to a particular city on a regular basis. I want to warn you right now. that some accountants and attorneys will tell you not to incorporate. If you are going to combine business with pleasure. You can benefit in so many ways from the tremendous tax deductible benefits you receive to the liability protection you enjoy. Frankly. you may be required to travel to various places both inside and outside of the United States. If you’re a real estate investor. you should incorporate immediately even if you are losing money. Your costs of travel. make sure you keep complete and accurate records of your business activities and the time you spent. If you are making sales calls on businesses in that area. These tax deductions will pile up and you will use them to offset future income. If you are just starting your business. They’ll tell you it costs too much money or that you don’t make enough money to incorporate. When you start to make a profit. Then. You are visiting the properties for a business purpose so the trip is tax deductible. You might just be hanging out at the beach. you must have a business purpose for the trip. you can easily understand why your business should be incorporated. And. You will spend several hundred dollars before you are finished with them. In plain English. are tax deductible for business purposes. you could own one or more properties near the location in which you’re interested. though. what if you have any questions about your corporation? Do you think they have the answers? . They are absolutely and unequivocally wrong. You can do it now or you can waste thousands of dollars of deductions and pay huge amounts of unnecessary taxes. the corporation can pay for the entire trip and get a tax deduction for it. this means you will take tax deductions now for expenses you are paying anyway like medical and automobile bills. You can use this tax deduction to your advantage in several ways. including meals.
The cassette tapes contain four hours of in-depth education about your corporation and getting the most bang for your buck. The course contains a complete set of forms for every move you’ll ever make as a corporation. you’re probably expecting I’ll charge more for this course than the most expensive attorney because it costs you nothing extra to listen to the tapes again and again. please click here. Thousands have followed these steps and formed their own corporation. Now. that’s only the beginning. “How to Create and Use Corporations”. Since 1992. “How to Create and Use Corporations” will show you exactly: how to maximize your tax deductions (5 pages of single-spaced items so you don’t miss any) the best ways to get the most benefits for you and your family how to save hundreds in attorney’s fees by holding your own annual meetings the difference between subchapters “C” and “S” and which tax status is right for you the truth about Nevada corporations and when they’re right for you As an attorney. To purchase “How to Create and Use Corporations”. you can form your own corporation like tens of thousands of people have done. The course manual is over 200 pages long. I want to make this information affordable for everyone so they get incorporated right away. The most important part of using your new corporation is what you do with it after you’ve formed it. you can do it. My home study course.” I continue to share this valuable information with thousands of business owners each year. too! But. By now. will provide you with step-by-step instructions. I represented many small business owners and dealt daily with their problems and concerns. . And all the forms are supplied on a CD so you can easily fill in the blanks and have them done ASAP. You can copy these forms and easily fill them in by following the instructions. That’s not going to happen.Or. Creating your own corporation is not that difficult once you learn the simple rules. I’ve been called. “How to Create and Use Corporations” contains mountains of valuable information. I have been travelling the country teaching small business owners how to maximize their business benefits and minimize their risks. “The attorney who’s taught thousands of people how to save millions of dollars.
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