The key reason of whether or not to incorporate revolves around the tax cost. Here's the general rule: Profits mean you should incorporate.
The key reason of whether or not to incorporate revolves around the tax cost. Here's the general rule: Profits mean you should incorporate. Let's define a "successful business" as one having a bottomline profit of $150,000 or less.
How does incorporation save taxes? The answer lies in the corporate tax rates for C corporations, which follow.
|Next $25,000 From||24|
|$100,000 to $335,000||39|
The individual tax rates start at 15 percent and go up to almost 40 percent. The best way to understand how the corporate and individual rates can be used in tandem to slash your tax bill is by a concrete example.
Assume Mary Entrepreneur operates a successful home business as a tax paying corporation, called Things & Stuff, Inc. Her husband, Sam, earns in excess of $200,000, which puts Mary and Sam in a solid 40 percent personal tax bracket. Last year Things & Stuff's profit was $60,000. This kicked up only a $10,000 corporate tax.
If Mary had operated as a sole proprietorship, her $60,000 of Things & Stuff income would have been added to Sam's income. This change would have resulted in $24,000 ($60,000 x 40 percent) in tax. The corporation saved $14,000 ($24,000 minus $10,000). Smart move, Mary!
Single business owners have special tax problems-all bad. During life: No, joint return; only a $10,000 gift exclusion per year donee (instead of $20,000 when married). At death: No marital deduction to stop the estate tax; only $625,000 estate tax free (instead of $1,250,000).
Well, here's a true talc of a single business owner.
Joe (a vigorous 68 years young) operates his business (a C Corporation,Success Co.) with his only son, Sam. He has three daughters-none in the business. Aside from Success Co., Joe's taxable estate includes land and building, which he leases to Success Co.; and two life insurance policies-one for $500,000 owned by and payable to Success Co., and one for $600,000 owned by Joe and payable to his kids equally.
We divided Joe's tax plan into two parts-lifetime planning and death planning. Following are the significant points of each plan. For the lifetime plan:
The death plan: Not much to do. Just a simple will leaving Joe's estate equally to the four kids.blog comments powered by Disqus