CORPORATIONS GET THE TAX BREAKS

By Angel Y. Dayan, EA (213)-365-1040

Owning a Corporation is a sure blueprint to tax savings and a good tax planning tool for those who are in business. It provides wider latitude of opportunities to reduce taxes, except for its distinct disadvantage of being taxed twice on the same business income it earned. Why is that? Dividends paid by corporations from its previously taxed net income are taxed again to the owners or shareholders the second time around. However, this potential double taxation could be easily avoided through corporate tax planning. Look for a good tax accountant who knows how to avoid double taxation. You should know that in this country, corporations contribute only a small portion to government’s revenue percentage wise to what individuals pay to the government. When we compare total percent contribution of corporate America to the costs of running our government, it is way below of what both you and me share to finance the costs of war, armaments, outerspace projects, politics, welfare, prison, education programs, etcetera. Another significant advantage of being a corporation is that its identity is considered to be another “person” and its juridical personality is separate and distinct from its owners who are known as “shareholders”. Therefore, corporations could face a lawsuit of its own with the owners being free from personal liability. High- risk businesses therefore are better set up as a Corporation rather than owned by the owners or individuals as sole proprietors. A corporation files its own income tax return separate from its President, Secretary or CEO and with all the rest of its shareholders. It pays its own taxes progressively that start at the rate of 15% or roughly about 25%, including the State of California Franchise Tax. Corporate tax returns are due to be filed no later than March 15, of every year one month earlier than the filing deadline for individuals is April 15.

What makes a lot of people shy away from running their business as a Corporation is the paperwork formalities required by law to take care of this business entity. People’s lack of knowledge on how to comply with the requirements of the law, brings them to accountants and lawyers for much needed help. Obviously, it costs more money in the process. However, I believe this costs should not be the cause not to be incorporated. Tax savings will easily exceed this cost. Learning the corporate formalities is not difficult also. Once one gets used to it, the procedures to having a Corporation are the same year in and year out. It is like learning a “sport” in business. So, why not set up your own Corporation.

Corporations are required to file some documents with the Secretary of State in Sacramento every year. It must also have its own bylaws, operating agreement, minutes of meetings, corporate seal, stock ownership certificates, and a set of officers who are responsible for the day- to-day business activities.

Here are a few of what I found corporations could deduct 100% against its income that individuals could not. Medical and dental expenses of officers and employees, life insurance premiums, car expenses of company owned cars, meals (lunch and dinner) for employees and officers, house rental expenses that are business-related, officers and staff training and education, company benefits paid to employees, membership dues, subscriptions and periodicals, telephone, uniforms, certain personal care expenses, certain expenses for pets, certain travel expenses, salaries paid to children, life insurance premiums. While all these expenses would be acceptable as deductions, there are peculiar rules around each of them that must be met. Consult with a good accountant on these areas before taking advantage of the tax benefits allowed by law.

As we go deeper into corporate taxation, let me introduce you to the different corporation tax entities that you could select for your business, namely the “C” Corporation, “S” Corporation and Limited Liability Company. There are rules that govern each type of these corporate entity structures and your wise selection of any for your business would need the advice of a professional. There are taxes “traps” also on each one of them even as the tax advantages I have described herein would seem significant. You are advised here to consult to consult with a professional as to which entity will best fit your business. Corporations could also be set up outside of the State of California for some distinct and peculiar advantages but I always recommend to my clients to set up a corporation in California. Our State is beginning to become business friendly because lately it has waived its minimum tax for newly formed small business California corporations.