WHY SHOULD YOU INCORPORATE?
April 15th is gone!...but it's not too late to reap the tax benefits of incorporating your business and to take advantage of the many tax benefits afforded to Corporations and LLC . Keep in mind that different corporate entities have different tax benefits, and certain states may better accommodate your business goals. This article will cover the benefits of incorporation, types of corporate entities, and common questions regarding where to incorporate.
Tax Deductions: Since you have just paid your taxes, you are keenly aware of how expensive taxes can be. One of the most important benefits of incorporation is greater tax deductions for your business, your employees, and potentially for family members of business owners. Even if you are the only shareholder and employee of your business, benefits such as health insurance, life insurance, travel and entertainment expenses may be deductible. Incorporating may also eliminate self-employment taxes and lower social security tax and Medicare tax payments. Your individual tax liability may also be reduced, as you will become an employee of the corporation. Corporations may also be taxed at a lower rate than unincorporated entities. Additionally, corporations often provide an increased tax shelter for qualified pension plans or retirement plans (e.g. 401Ks). Favorable tax treatment for fringe benefits can also be a compelling reason to incorporate your business.
Business Loss Deductions: With incorporated entities, there are no limits or restrictions on the amount of capital or operating losses that may be carried back or forward to subsequent tax years. Unincorporated entities, however, are subject to more stringent rules regarding corporate losses.
Income Shifting: "Income Shifting" – the act of dividing income between a corporation and its shareholders in a manner that lowers overall taxes – is often considered one of the greatest benefits of incorporating. Profitable, small businesses with shareholders in higher tax brackets stand to benefit the most from the practice of income shifting. Interestingly, smaller corporations (those with fewer than 100 employees) are not necessarily concerned with corporate tax rates since profits are usually paid out as tax-deductible salaries and fringe benefits to corporate employees. However, paying out ALL profits may not be viable for a corporation that plans to retain earnings to expand its product line or increase its advertising budget next year. Fortunately, profits retained within a corporation are taxed at the initial tax rate of only 15%. It is this ability to retain earnings within the business, without imputing tax liability to shareholders that provides an invaluable tax advantage to growing corporations that is not available to S-Corporations and unincorporated businesses.
Leasing Assets to your Corporation: Leasing personally owned property (real estate, automobile, or even a domain name) to a corporation may provide tax savings. Please note, however, that the IRS will often scrutinize this type of leasing arrangement. Therefore, the lease terms must be fair to both parties in the transaction (to you and your corporation). This benefit of incorporating is similar to "Income Shifting," as discussed above.
