Tax savings with Nevada corporations.
Income tax strategies are important tools in
preserving your income. Consider the following
highlights about federal and state income
taxes.
Federal Income Tax.
Income from all business organizations, except
corporations, is taxed at individual rates. For
those entities which qualify as "S" corporations or
as "flow through" LLC’s, their income also is
passed through to the shareholders and is taxed at
individual rates. Consider the following comparison
of three federal income tax rates, which are based
upon tax year 1998 data.
In all three cases in the chart which follows
assume that the business had a taxable income of
$100,000. The first is for a single individual, the
second for a married couple filing jointly, and the
third is for a corporation. Here are the amounts
each would have paid in 1998 federal income
tax:
|
Single
|
$25,862
|
|
Married Filing Jointly
|
$22,494
|
|
Corporation
|
$22,250
|
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Careful! It appears that the corporation is in
the most favorable position from a federal income
tax point of view; and, given the right set of
circumstances that might well be true. However,
this illustration does not include the fact that if
any portion of the corporation's income is
distributed to the shareholders, then those
dividends are taxed to the individual shareholders
in addition to the tax paid by the corporation--the
"double taxation" whammy! Nevertheless, if the
shareholders are in a lower tax bracket, or if the
corporation is not currently paying dividends, then
clearly the corporate form would be advantageous in
this example.
Other available tools are the "S"
corporation and our preference, the LLC. By making
the "S" election or by utilizing the LLC as an
"income pass through" entity, your firm is not
taxed as a separate corporation, but the earnings
of the business are passed through to the
individual shareholders and are taxed at their
individual rates.
State Income Tax.
How much did your business pay to your state in
income taxes last year? Whatever the amount, by
arranging your business affairs so that your Nevada
corporation actually earns a portion of your
business income, you can easily reduce, or possibly
eliminate, state income taxes on your business.
Remember, Nevada has no corporate income tax and no
individual income tax.
Other Taxes.
Your state probably has one or more of the
following taxes which it imposes on corporations in
your state. Use the checklist to compare your
state's "other taxes" with those of Nevada.
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|
Franchise Tax on Income
|
Yes or No
|
NV NO
|
|
Capital Values Tax
|
Yes or No
|
NV NO
|
|
Stock Transfer Tax
|
Yes or No
|
NV NO
|
|
Inheritance Tax
|
Yes or No
|
NV NO
|
|
Gift Tax
|
Yes or No
|
NV NO
|
|
Estate Tax
|
Yes or No
|
NV NO
|
|
Inventory Tax
|
Yes or No
|
NV NO
|
The
Best Tax Shelter is Your Own Corporation or LLC.
If you own your business, you can take advantage
of certain tax strategies to substantially improve
your cash flow and the quality of your life. For
example, you can have your corporation start a
Medical Reimbursement Plan for employees.
Rationale: The only medical expenses you can deduct
on your personal tax return are those that exceed
7.5% of adjusted gross income (AGI). So if your AGI
is $40,000 and you have medical expenses of $1,000,
you're $1,000 out of-pocket-with no tax benefit
whatsoever. But if your company reimburses you, it
can deduct the $1,000. Net cash outlay $660 if the
company is in the 34% tax bracket. Caution, this
strategy works only if the plan applies equally to
all employees. If it is limited to top officers,
they will be taxed as though the reimbursements
were salary income. Caution: In the case of
shareholders, dividend treatment may result. Even
that isn't necessarily terrible. Aren't you still
better off paying $660 in taxes than $1,000 in
medical bills?
Remember: The way you take money out of your
company makes a difference in your taxes. Dividends
are taxed twice - once to your company (because
they aren't deductible) and once to you. (See the
myth of double taxation)
Salaries
are taxed only once. Obviously, the more of your
total compensation you take in salary the better.
There's a limit, though-your salary must be
reasonable." Guidelines: Your education, knowledge,
expertise and what top executives in similar
companies' make. If it appears to the IRS that the
reason for the compensation is your ownership
interest, it's probably a dividend. If, on the
other hand, the reason appears to be the blood,
sweat, and tears you put into the company, it's
probably salary. "S" corporations are a way around
the whole salary versus dividends problem. The "S"
corporation pays no taxes itself. Instead, the
owners pay taxes on their proportionate share of
the company's income. For tax purposes, this is
really equivalent to receiving all salary and no
dividend. Most attorneys and tax professionals now
use the LLC type entity rather than the "S"
corporation since it is usually much more flexible
and less subject to IRS regulations than the "S"
corporation. The LLC entity can elect to have
pass-through taxation like the "S" corporation or
to be taxed as a corporation.
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Potential
Drawback ("S" Corp and LLC): You may have to
pay the tax on your share of income whether or not
you take money out of the company and
self-employment tax even on undistributed but
earned income if you elect pass-through
taxation.
Perks
are another way to use your business to improve
your standard of living, and they are nontaxable if
you can show they are necessary to your business.
This can be tricky. For company cars, you must
charge your employee(s) (yourself if you are an
employee) fair rental value for any personal use of
the car. But the amount you charge can be less than
what Hertz charges. Of course, if a perk fails the
necessity test, you can still take a deduction (to
the extent your non-reimbursed business expenses,
together with other miscellaneous itemized
deductions, exceed 2% of AGI) for whatever part of
the expense is attributable to business. Example:
Membership dues for a club at which you do a lot of
business entertaining. Be sure you have good
documentation for any such claims.
Home
Offices have been attracting attention from
the IRS lately if the home office is for your
convenience rather than the companies, and if you
have somewhere else to work, you won't be allowed a
deduction. Exception: If you have a sideline
business that produces additional income such as
consulting, and use your home office as either a
principal place of business or a place to meet with
clients, your deductions for home office expenses
will be allowed. (Note: the IRS is currently
updating their thinking in this area and it appears
that it will become more reasonable in this area.
Check with your accountant or local IRS
official.
Charity:
Other areas in which tax laws play favorites with
entrepreneur's Charitable donations. Give stock you
hold in your company to charity then have your
company buy it back You get a deduction for the
full market value of the stock-with no personal
cash outlay and the charity gets cash.
Retirement
Plans. As a self-employed individual, you
can open a Keogh Plan, IRA, or even a 401K.
Pay
Your Child a Tax Deductible Allowance.
Paying your children to work in your business is a
good way of providing tax-deductible allowances. A
child with no other income can earn up to $4,000
tax-free (indexed for inflation). Caution: Keep
very good records of the type of work they do and
the hours they put in. The mere fact that you pay
wages to your children may not be sufficient to
qualify as a legitimate deduction.
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