Corporations are taxed as entities separate from their individual owner. If you are not incorporated and your business is doing well and making a lot of money, all the profits from your business will be taxed on your personal return in the year that the profits were earned. Here's where incorporating your business may prove to be a smart tax-saving plan if you are intending to reinvest the profits in your business. If your business is incorporated, the first $75,000 of profits in the business will be taxed at a lower rate than if you claimed them on your personal tax return. There is an exception to this rule however. Personal service corporations, such as accounting, consulting, legal and medical firms are required to pay a flat tax rate of 35% on their taxable income.
Another possible tax advantage of corporations is that corporations can pay for employee benefits, such as health insurance, disability and up to $50,000 in life insurance on a tax-deductible basis. Unlike unincorporated and sole-proprietorship businesses where the owner cannot deduct his or her own benefits, incorporated businesses treat their owners as employees for benefits purposes and therefore owners may take the tax deduction on their own as well as their employees's benefits.
Be careful when incorporating your business for the sole purpose of paying less in taxes than you would if you had to claim your profits on your personal tax return. This could wind up backfiring on you if you want to pay yourself the profits. That it because you will first pay taxes on the money at a corporate tax rate, then you will pay taxes again on your personal tax return when you pay yourself from the corporate earnings. This way, you will end up paying more in taxes and the corporate infrastructure will provide you little in the way of a tax cut.
Keep in mind also that you cannot immediately claim losses on your incorporated business on your personal tax form and must wait until you can offset your losses by profits. This especially affects newer businesses, as most produce very little revenue in their first few years and losses are very common.
|1999 Corporate Tax Rates for Regular (C) Corporations|
|Taxable Income||Tax Rate|
|$0 - $50,000||15%|
|$50,001 - $75,000||25%|
|$75,001 - $100,000||34%|
|$100,001 - $335,000||39%|
|$335,001 - $10,000,000||34%|