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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: RIVERWOODS, Ill., Feb. 7, 2012 /PRNewswire/ -- As more and more baby boomers are reaching retirement age, they'll have many factors to consider in choosing where to live in retirement, including the tax ... NEW YORK (TheStreet) - Candidate Mitt Romney wants you to believe he will lower taxes while cutting the national debt. But President Romney will need to raise taxes if he is going to have any chance of lowering U.S. debt, according to his former private equity pals. Now a strong frontrunner for the Republican presidential nomination, Romney has repeatedly said that cutting the national debt ... When it comes to taxes, it seems that everyone has an opinion. Whether it's the way they're spent (or misspent), or whether we should pay less (or someone else should pay more), this surprisingly feisty ... WASHINGTON, Feb. 6 (UPI) -- Small U.S. business owners are unhappy with the amount of taxes large corporations and their executives pay, a recent survey indicates. With tax season getting under way, today I'll answer reader questions about property taxes, the new Medicare surcharge starting in 2013 and how to get those old-fashioned paper tax forms. Q: Tony G. asks, "Has anything... Small business owners see corporate tax loopholes and the shifting of U.S. profits to offshore tax havens as serious problems, according to a new independent national poll. Small business owners think big corporations and the wealthy don’t pay their fair share of taxes, the poll shows. Retirees can face hefty taxation if they don't follow certain strategies when managing their money. Using these tactics will help lower the bill. These strange taxes are making everything from bagels to hot air balloon rides more expensive. Kevin Drum looks at how regressive taxes are at the state and local level, an issue that doesn’t get nearly enough attention. Is it April Fool’s Day? Has somebody in Paris hacked the website at the Organization for Economic Cooperation and Development? Have we been transported to a parallel dimension where up is down and black is white? |
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