Monday, July 16, 2007

The Tax Benefits of Corporations

There are three standard types of legal business entities. The proprietorship, the partnership, and the corporation. Each entity has pros and cons. The tax benefits of corporations are one advantage to incorporating.

Corporations are taxed differently than the other business entities. Proprietorships and partnerships are taxes after the earnings pass through to the business owners, thus appearing on the owner personal taxes. Where as a corporation is treated as its own entity and thus is it files its own tax return and pays its own income taxes based on profits.

Under the law a corporation is a separate legal entity separate from its owners who are the shareholders. The company is responsible for taxes and files it’s taxes like it were a person. It is responsible for taxes on the net profit after all business deductions have been taken from the gross income.

A corporation can legally reduce the amount it owes in taxes by taking valid business expense deductions. A valid business expense is any expense that a corporation incurs in the pursuit of making a profit. Some examples of business expenses are wages, rent, mortgage, utilities, vehicle expenses, and the cost of product to name just a few.

A corporation is required to file a corporate tax return and pay taxes at the corporate tax rate. Corporations are required to estimate what they will owe for the year and make their payments quarterly in advance of when the taxes are actually due.

Salaries and bonuses of all employees is a valid business expense that can be deducted form the gross income. If you are the owner and you work for the company your salary is also a legitimate deduction because you will pay the tax due on this income when filing your personal income tax.

If a corporation pays dividends to its shareholders the corporation must pay taxes on this money and so must the shareholder when they claim it on their income tax. What this means is that dividends are actually taxed twice.

Reporting and paying taxes on a corporation is time consuming but the benefits far outweigh the additional time it takes for the bookkeeping. We’ll look at a few of the common benefits but there are several and you should consult a tax expert to ensure you are getting all the deductions you are entitled to.

Many times a corporation want to retain some of its profits in the business at the end of the year so that they have the working capital for future growth. When a corporation does this it is taxed at the lower corporate tax rates which saves a great deal of money. If the business was a proprietorship or partnership even though the money was left in the business the owners would be taxed at the regular personal income tax rate on this money as if they had personally drawn it out.

Another benefit is that the owners or shareholders of a corporation are sheltered from any liability the corporation might incur. Because the corporation is seen legally as it’s own entity shareholders and owners can not be held responsible for debt incurred, unless they sign a personal security bond. This means your personal assets such as your home, vehicles, or bank account are not at risk should your business fail.

There are many tax benefits of corporations. The tax benefits you will qualify for will depend on many factors and it is always a wise idea to discuss deductions with your accountant to make sure you are getting the maximum benefit and are only taking deductions you are entitled to.

Deon Melchior is the Editor and Publisher of Article Click. For more FREE articles for your ezine and websites visit Article Click is a free content article directory. This means that as a publisher you may reprint the articles that are included in our site, as long as the article is unedited and the author box is included with it's live hyperlinks.

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