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Taxes Information |
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Tax Trap #2 -- Double Taxation: Isnt Once Enough?
Have you been thinking about incorporating your smallbusiness or self-employment activity? The advantagesare many! For starters, you'll be protecting yourself and your familyfrom the possible of a business ending lawsuit. Forming acorporation is Step One on the path known as "AssetProtection" -- you are moving from the world of unlimitedliability to the world of limited liability. (NOTE: For further insight into the legal advantages ofincorporating, check out the article: "It Can Happen To You:Why Any Sole Proprietorship Is A Risky Business" athttp://www.YouSaveOnTaxes.com/happen-to-you.html) From a tax standpoint, there are both advantages anddisadvantages to incorporating. Yes, forming a corporationcan either reduce your taxes or increase your taxes,depending on what type of corporation you create. There are two main types of corporations: "C" Corporationsand "S" Corporations -- and which type you choose can makeall the difference in the world of taxes. NOTE: The question of "C" Corp vs. "S" Corp has no effecton the asset protection provided by your corporation.This is a tax issue, not a legal issue. A "C" Corporation can lead you into a Tax Trap known as "double taxation". Yes, income from a "C" Corporation canactually be taxed twice -- once when it's earned on thecorporate level and again when it's paid to you, the shareholder, in dividends. There are several ways to avoid double taxation. Oftenthe easiest way is to tell the IRS that you choose tobe an "S" Corp instead of a "C" Corp. The profits ofan "S" Corp are not taxable to the corporation; instead,those profits are reported directly on the shareholder'spersonal income tax return and are therefore onlytaxed once. And once is enough, don't you think! Of course, any article on Choice of Entity must containthe old disclaimer, "Consult your tax professional" -- I am not prescribing a one-size-fits-all approach tothis issue. But for many small biz owners and self-employedfolks, the "S" Corporation is a good fit becauseit provides protection from personal liability andavoids the nasty tax trap of double taxation -- twogreat benefits worth checking into. Should you incoporate your sole proprietorship and thendecide that the "S" Corporation is the right fit,you must inform the IRS that your corporation is choosing"S" Corporation status by filing Form 2553, which is,in effect, an application to become an "S" Corporation. IMPORTANT:If you incorporate and do not file Form 2553, you areautomatically considered to be a "C" Corporation by the IRS.In other words, to be a "C" Corporation, you just incorporate; there is nothing you have to do to inform theIRS you want to be a "C" Corporation. There are critical rules regarding how and when to fileForm 2553, so be sure to read the instructions carefully,or check with your tax pro. Failure to file Form 2553 on time or filing Form 2553incorrectly results in a rejection of your corporation's"S" Corp application, and the corporation is then by defaulttreated as a "C" Corp, subject to double taxation, thevery trap you were trying to avoid. To download a copy of Form 2553, go to:http://www.irs.gov/pub/irs-pdf/f2553.pdf The instructions for filing Form 2553 are found here:http://www.irs.gov/pub/irs-pdf/i2553.pdf Wayne M. Davies is author of 3 tax-slashing eBooks forthe self-employed, available separately or as a 3-volumeset, "The Ultimate Small Business Tax Reduction Guide".http://www.YouSaveOnTaxes.com/ultimate-guide To get your free copy of Wayne's 25-page report,"How To Instantly Double Your Deductions" visit:http://www.YouSaveOnTaxes.com
MORE RESOURCES: Those who oppose higher taxes and are fed up with record levels of U.S. debt may pine for Ronald Reagan, the patron saint of lower taxes and smaller government. WASHINGTON — Raising taxes on the wealthiest Americans, as President Barack Obama proposes to do, probably wouldn't wreck the moribund U.S. economy, but extending the tax cuts they've enjoyed since 2001 could spur some economic benefit. Burnsville council approves 5.6 percent maximum hike after austerity measures in 2010 by John Gessner Thisweek Newspapers In stark contrast with this year’s austerity measures, Burnsville will raise 2011 city taxes by up to 5.6 percent and avoid deep budget cuts next year. The City Council voted 3-2 on Sept. 7 to certify a maximum levy increase of 5.6 [...] Taxes headed back up in 2011 is a post ... Jupiter holds taxes steady, eliminates 8 jobs from budget Property taxes will stay the same for Abilene residents. So many different taxes, and they all keep going up, Gettysburg resident Ken Groff said, shaking his head. Two primary contests for Johnston council and three for School Committee are at stake Sales tax collections – a major source of funding for local governments – are holding strong in Andalusia and the county, the most recent numbers show. The figures, which represent taxes collected in July and remitted in August, are the most recent available. Andalusia showed an approximately 2 percent increase to $364,912, city officials said Thursday. Year-to-date, [...] Capitol Hill employees owed $9.3 million in overdue taxes at the end of last year, a sliver of the $1 billion owed by federal workers nationwide but one with potential political ramifications for members of Congress. United States - Washington DC - Back taxes - Capitol Hill - Neighborhoods Taxes go downSeveral letters have complained about property tax increases. However, we are having the opposite experience: Our home's assessed value decreased by about 30 percent, and our taxes will come down almost 20 percent if no budget change is adopted, and 30 percent if the proposed change is adopted. |
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