Special Report How to Get the Same Tax Benefits as Fortune 500 Corporations

by Shawn M. Casey, Esquire When you do business in your own corporation, you open up a whole new world of opportunities for increasing your net profit through proper tax planning. The corporation will also protect you from personal liability for problems involving corporate assets or employees. The corporation has been called the Ultimate Tax Shelter and the Last Way Left for the Little Guy to Get Rich. When you realize that all the tax advantages available to the big guys, i.e., IBM, GE, etc., are now available to you for your small business, you have to be excited about the possibilities.

Why Incorporate?
The first reason to incorporate is to avoid personal liability. The corporation was originally conceived to provide business owners with protection from liability. The idea was to encourage people to create and grow businesses by eliminating some of the risk of personal loss. Risk is something we all face in our businesses. The proper analysis and reduction of risk allows us to prosper without fear of losing everything. If you structure your affairs properly, you can make it virtually impossible for any lawsuit to seriously hurt you. The owners of the corporation are the shareholders. It doesnt matter how many shares you own. Your percentage of the total shares issued by the corporation determines your percentage of ownership. Shareholders are not liable for corporate activities. If an employee causes an accident, the victim can obtain a judgment against the corporation, but not against the shareholder. If an employee becomes disgruntled, he can obtain a judgment against the corporation, but not against the shareholder. If someone is injured on corporate property, the result is the same. If the corporation is sued, the corporate assets are at risk, but the shareholders remain safe and secure. As long as the corporation is properly run, the shareholders are not at risk. The second reason to incorporate is the available tax advantages. As the Internal Revenue Service and Congress developed the tax code, two methods of taxing corporations were created. Depending on your choice of tax treatment as a C corporation or an S corporation, you can alter the level and effect of taxation. With proper tax planning, you can greatly reduce your income taxes and dramatically increase your net income. Youll find a further explanation of tax advantages below. The third reason to incorporate is to avoid being designated as a real estate dealer by the Internal Revenue Service. If you are a real estate investor who buys real estate with the intent to sell (property you

flip or quick turn), the Internal Revenue Service can choose to classify you as a dealer. The problems with being classified as a dealer are: 1. You cannot depreciate any real estate, including long term investment property. This greatly increases your taxable income. 2. Instead of reporting rental income on Schedule E of your personal tax return, you report your rental income on Schedule C. Then, you report the net income from Schedule C on Schedule SE. Schedule SE is the schedule used to figure your self employment income tax. You will pay up to 15.3% of your net income as additional taxes over and above your income taxes. 3. You cannot defer the tax due on the sale of a property by using tax deferred exchanges under Section 1031 of the Internal Revenue Code. Section 1031 allows the owner of investment real estate to sell his property, escrow the net proceeds, purchase additional investment property and avoid paying part or all of the income tax which would otherwise be due. For more information on tax deferred exchanges, please refer to the Special Report titled, How To Never Pay Taxes When You Sell Real Estate. 4. You cannot elect to use the installment method of reporting the sale of real estate. Usually, when you sell a property and receive payments in lieu of the complete purchase price, you can choose to report the money you receive as income only when you actually receive the money. Without the option to elect the installment method of reporting, you must report the total amount of the sale and pay the full amount of tax due, even if you have not yet received the money. If you sold a property for $50,000 with a $5,000 down payment, then you could actually owe more income taxes than the $5,000 you received from the purchaser. To avoid being classified as a dealer, savvy real estate entrepreneurs buy and sell real estate through their corporations. If the corporation is classified as a dealer, the individual is not affected. The individual can continue to report his rental income on Schedule E and receive the appropriate tax advantages. If the corporations tax status is hurt by being classified as a dealer, you have the option to dissolve the corporation and start a new one. The corporations tax status is usually not affected by the classification as a dealer because the penalties for being a dealer do not hurt the corporation when it simply buys and sells real estate.

How Do You Get Started?

The first step to incorporate is to choose the state of incorporation. You have two basic choices the state in which you live or Nevada. You will obviously be doing business in your home state. This alone is usually a good reason to form your corporation in that state. You should be aware, however, that more corporations are formed in Nevada than in any other state. Nevadas laws provide more privacy and protection for the shareholders than any other state. Some of the primary advantages of Nevada are:

1. Nevada does not levy any corporate or individual taxes. Most other states have corporate income taxes, franchise fees or both. 2. Nevada does not require the shareholders to be disclosed. If the shareholders names are not included in the filed information, then no person can discover them from the public information. 3. Nevada allows the articles of incorporation to eliminate any liability of the directors. In other states, the directors can be held liable to outside parties and to the shareholders. 4. Nevada is the only state which does not have an information sharing treaty with the Internal Revenue Service. Other states share your personal and corporate income information with the Internal Revenue Service. Many people choose to incorporate in Nevada to take advantage of these laws. You can form your Nevada corporation without ever going to Nevada. You can use one of several incorporation services which will file the necessary documents for you. These services will also act as the required registered agent within Nevada. After you have filed your incorporation papers, you will hold the initial meetings of the shareholders and the directors. You will need to determine who will serve as the officers and directors. The corporation is required to have three officers a president, a secretary and a treasurer. In most states, one person (you) can act as all three officers. You can also just have one director on the board of directors in most states. As the owners of the corporation, the shareholders elect the directors to the board of directors. The directors then elect the officers. The directors and officers serve a one year term or until their successors are elected. In addition to electing the officers and directors, you will authorize and approve the bylaws, articles of incorporation, stock certificates, and other such matters at the initial meetings. Once you have completed these meetings and filed the appropriate information in the corporate record book, you have finished the process of incorporation. Many people wonder if they can handle this task themselves or if they should hire an attorney. An attorney will charge from $500 to $750 plus the cost of the state filing fees. If you have the right information available, you can file the correct documents with the state and complete all the corporate documents yourself. You are required to hold annual meetings of the shareholders and directors. An attorney will charge from $200 to $400 to complete the minutes of these meetings. With the proper information, you can hold these meetings and complete the meetings yourself. Forming and running your own corporation is fairly simple. Certainly, you can handle all the required tasks yourself. Doing it yourself provides you not only with a significant cost savings, but assures you that everything is done just the way you want it.

What Are Your Tax Options?

The Internal Revenue Service automatically treats every corporation as a Subchapter C corporation.

The shareholders can unanimously elect to be treated differently, as a Subchapter S corporation. A C corporation has no limits on the type of shareholders, the number of shareholders or the classes or types of stock. An S corporation can only have 75 shareholders. An S corporation can only have one class of stock which must be common voting stock. A C corporation is a separate taxpayer. This means a C corporation pays tax on its net income. If you are the owner of the corporation and an employee, you can make certain that the corporation never pays taxes by spending all the money each year. If profits are still undistributed as you approach the end of your tax year, you can pay yourself those profits as a bonus. Because the C corporation is a separate taxpayer, you will have a variety of tax planning options available with the C corporation that are not available with an S corporation. You may have occasion to choose to leave profits in the C corporation. Like you, the C corporation has tax brackets so the tax rate increases as the income rises. Many people think corporate tax rates are very high, much higher than individual tax rates. While this is true at the high income levels, at lower income levels the corporate tax rates are quite reasonable. For example, the first $50,000 of corporate net income is taxed at only a fifteen (15%) percent rate. This rate is sometimes lower than your personal tax rate. An S corporation files a tax return, but does not pay taxes. The shareholders pay taxes on the net profits in accordance with their respective shares of ownership. If the corporation has a net profit which it retains and does not distribute, the shareholders pay taxes on the money anyway. In one specific situation, an S corporation is particularly useful when you are starting a business and expect to lose a substantial amount of money for a few years. The losses will be reported on the shareholders tax returns and can offset other income.

Can You Choose the Tax Year Of the Corporation?

After the 1986 Tax Reform Act, an S corporation is generally required to have the same tax year as the shareholders (you). An S corporation will have a tax year which begins January 1st and ends December 31st. A C corporation can choose from twelve (12) possible tax years. The only requirement is the tax year must end on the last day of a month. Since your tax year ends in December, you may want to choose a corporate tax year with a different ending. A common choice is a tax year which begins July 1st and ends June 30th. If you were doing business as a sole proprietor, a partnership or an S corporation and you had (a) a large undistributed profit in December or (b) a large of sum paid to you as profit in December, you would have no choice except to recognize the income in the current year and pay taxes accordingly. Another option would be to run your business as a C corporation with a tax year ending on June 30th. If you have either situation (a) or (b) above, then you dont have to worry about distributing the income until June 30th of the following year. You have the right to shift the income from the current year to the next year. When you set up your C corporation correctly, you will have the opportunity to engage in this type of tax

planning. Proper tax planning can provide significant tax savings annually. When the profit is still sitting in the corporation in December, you have two (2) choices. The first is to leave the money in the corporation and deal with it next year. The second is to pay the money out in expenses and bonuses to yourself, and pay taxes in the current year. You will make this choice based upon your specific situation. Your goal is to pay the least amount of income taxes and this setup will allow you to adjust to changing situations. If you leave the money in the corporation, you can then pay yourself a salary on January 1st. You have now shifted the income and the tax to the next year, but you have the money available to you personally now. You could also choose to leave the money in the corporation until the end of the corporations fiscal year. You would then determine how much money you should distribute to keep your income taxes as low as possible.

How You Can Get the Best Employee Benefits Available

When you go to work for your corporation, you want to provide the best benefits available for the sole employee (you!). You can also provide some or all of these benefits when you have additional employees. Please be advised that you can only provide yourself with a limited amount of tax deductible benefits if you dont make them available to the other employees. The most important benefit you can provide is a Medical Expenses Reimbursement Plan. This plan provides for the payment by the corporation of all medical expenses for the employee, his spouse and his dependent children. The corporation will pay for medical insurance, co-payments, deductibles, pharmaceutical drugs, and expenses not covered by insurance, including elective surgery. While these are all expenses you would be paying anyway, the corporation will get a tax deduction for each expense. You dont get a tax deduction for medical expenses except for that part which exceeds seven and one-half (7.5%) of your adjusted gross income. If you are paying $5,000 annually for medical insurance and expenses, wouldnt it be great to have the government give you a break and contribute a little something to help. To really understand the huge benefit to you, you have to realize how pre-tax and post-tax incomes differ. When you personally are paid $100,000, you pay about $30,000 in federal, state and local taxes on it. You have just $70,000 of post-tax income left to pay your bills. Wouldnt it be a lot better if you could pay your bills using the entire $100,000 instead of just $70,000? The corporation can and does use the entire $100,000 as pre-tax income available to pay expenses. When the corporation provides medical or other benefits to you, these benefits are tax deductible expenses to the corporation. In other words, neither the corporation nor you will ever pay income tax on the money used by the corporation to pay benefits on your behalf. Since you are going to pay expenses such as medical and automobile costs anyway, doesnt it make sense for you to allow your corporation to pay them on your behalf and get the tax deduction? The medical reimbursement plan requires special language and documentation during the formation of the corporation. You must set up the plan correctly to get the tax deduction. It is only available to you as an owner if your corporation is treated as a C corporation. This does not apply to an S corporation.

The corporation can provide additional insurance coverage for you. It can pay for life insurance, disability insurance, long term care insurance, catastrophic illness insurance and many other types of insurance.

How to Get Your Own Company Car

Most self-employed people need a car or truck to carry out the work of the corporation. The corporation can pay the car payment, gas, oil, maintenance, insurance and repairs. The employee can use the car for personal as well as business reasons. The corporation will receive a tax deduction for the business use percentage of all expenses. The Internal Revenue Service imposes limits on the price of the vehicle you can purchase. If the price of the vehicle is greater than about $15,000, the corporation may not be able to deduct the entire cost of purchase. Education is not a tax deductible expense to the individual or the corporation if the education is for the purposes of learning how to invest in anything or for you to learn a new skill. Education is tax deductible for business purposes if you are maintaining or improving your skill in your current business. Educational expense deductions are readily available to corporations engaged in a particular business. If, prior to incorporating, you incurred expenses such as education to improve your skills in your chosen business, you should be certain to reimburse yourself. The corporation will then receive a tax deduction for the expenses incurred. If you work from your home, you have the opportunity to deduct the portion of your homes expenses that correspond to the business use of your home. To determine the percentage you can deduct, you first have to figure out how much space you use which is solely used for your office. Your dining room table doesnt count. Your living room table doesnt count. You must use the space solely for business. For example, if you use an 8' by 8' foot room for your business, you are using 64 square feet. You divide the 64 square feet into the total square footage of your house (well use 1,800 square feet). You can use 3.55% of your house expenses as a business deduction. Since you are already receiving a personal deduction for your home mortgage interest and your real estate taxes, you will only be deducting expenses like utilities. For most people, the home office deduction is more trouble than its worth. The home office deduction is also an item the Internal Revenue Service will always look at closely. The Internal Revenue Service is so concerned with this deduction because they know many people exaggerate the space they use for business and the actual expenses. Even if you dont take a deduction for the home office, you can deduct the actual expenses associated with your business. These include the usual business expenses as well as alterations or improvements necessary for your business such as telephone or electric outlets. If you purchase expensive pieces of equipment such as a computer system, you usually cant take a deduction for the full amount of the expense. You are required to amortize the cost of the asset over its useful life (normally 3 to 5 years). An important exception to these rules is contained in Section 179 of the tax code which allows your corporation to deduct the full cost of any equipment purchases up to an annual total of $17,500. In other words, the tax code allows you to do the obvious get a tax deduction in full when you spend money now.

Travel the World in Tax Deductible Style

As part of your business, you may be required to travel to various places both inside and outside of the United States. Your costs of travel, including meals, are tax deductible for business purposes. You can use this tax deduction to your advantage in several ways. You might, for instance, desire to travel to a particular city on a regular basis. You might be visiting your son at college. You might just be hanging out at the beach. If you combine business with pleasure, the corporation can pay for the entire trip and get a tax deduction for it. First, you must have a business purpose for the trip. If youre a real estate investor, you could own one or more properties near the location in which youre interested. You are visiting the properties for a business purpose so the trip is tax deductible. If you are making sales calls on businesses in that area, the trip is tax deductible. If you are going to combine business with pleasure, make sure you keep complete and accurate records of your business activities and the time you spent. When you put it all together, you can easily understand why your business should be incorporated. You can benefit in so many ways from the tremendous tax deductible benefits you receive to the liability protection you enjoy. Frankly, its foolish to engage in business without a corporation. I want to warn you right now, though, that some accountants and attorneys will tell you not to incorporate. Theyll tell you it costs too much money or that you dont make enough money to incorporate. They are absolutely and unequivocally wrong. You should incorporate as soon as possible. If you are just starting your business, you should incorporate immediately even if you are losing money. When you start to make a profit, you will use the previous loss to reduce the profit. In plain English, this means you will take tax deductions now for expenses you are paying anyway like medical and automobile bills. These tax deductions will pile up and you will use them to offset future income. You can do it now or you can waste thousands of dollars of deductions and pay huge amounts of unnecessary taxes.

Whats Your First Step?

You have several options for forming your own corporation. You could call an attorney and spend more than a thousand dollars just to get the corporation formed. Then, you can call with him questions and pay him $3 or more for every minute youre on the phone. You could call one of those incorporation services that advertises Only $99 To Set Up Your Corporation. Let me tell you the $99 is just the beginning. You will spend several hundred dollars before you are finished with them. And, what if you have any questions about your corporation? Do you think they have the answers?

Or, you can form your own corporation like tens of thousands of people have done. Creating your own corporation is not that difficult once you learn the simple rules. My home study course, How to Create and Use Corporations, will provide you with step-by-step instructions. Thousands have followed these steps and formed their own corporation. Now, you can do it, too! But, thats only the beginning. The most important part of using your new corporation is what you do with it after youve formed it. How to Create and Use Corporations will show you exactly: how to maximize your tax deductions (5 pages of single-spaced items so you dont miss any) the best ways to get the most benefits for you and your family how to save hundreds in attorneys fees by holding your own annual meetings the difference between subchapters C and S and which tax status is right for you the truth about Nevada corporations and when theyre right for you As an attorney, I represented many small business owners and dealt daily with their problems and concerns. Since 1992, I have been travelling the country teaching small business owners how to maximize their business benefits and minimize their risks. Ive been called, The attorney whos taught thousands of people how to save millions of dollars. I continue to share this valuable information with thousands of business owners each year. How to Create and Use Corporations contains mountains of valuable information. The course manual is over 200 pages long. The cassette tapes contain four hours of in-depth education about your corporation and getting the most bang for your buck. The course contains a complete set of forms for every move youll ever make as a corporation. You can copy these forms and easily fill them in by following the instructions. And all the forms are supplied on a CD so you can easily fill in the blanks and have them done ASAP. By now, youre probably expecting Ill charge more for this course than the most expensive attorney because it costs you nothing extra to listen to the tapes again and again. Thats not going to happen. I want to make this information affordable for everyone so they get incorporated right away. To purchase How to Create and Use Corporations, please click here.