If your business is not Incorporated read this!

By lrving L. Blackman

Although there are many reasons why you should or should not incorporate, the key reason revolves around what is the tax cost. Here's the general rule: Profits mean you should incorporate. For the successful business, the simple fact of incorporation usually means immediate tax savings. For our purpose let's define a "successful business" as one having a profit of $150,000 or less.

How does incorporation save taxes? The answer lies in the corporate rates for C corporations:

15% for income of $50,000 or less; 24% on the next $25,000; 34% on the next $25,000; 39% from $100,000 to $335,000; and 34% on income of more than $335,000. The individual tax rates start at 15% and go up to almost 40%

The best way to understand how the corporate and individual rates can be used in tandem to slash your tax bill is by a concrete example,

Assume Mary Entrepreneur operates a successful home business as a tax-paying corporation called Things & Stuff Inc. Her husband, Sam, earns in excess of $200,000, which puts Mary and Sam in a solid 40% personal tax bracket. Last year Things & Stuffs profit was $60,000. This kicked up $10,000 corporate tax. If Mary had operated a sole proprietorship, her $60,000 profit would have been added to Sam's income, which would have resulted in $24,000 ($60,000 x 40%) in tax. The corporation saved $14,000 ($24,000 minus $10,000). Smart move, Mary!

Learn more from A Tax Road Map for Home Business andStarting a Business... 102 Tax-Saving Ideas to Make You Rich

$27 each or $45 for both) from Book Div., Blackman Kallick

Bartelstein, 300 South Riverside Plaza, Chicago 60606. 

Irv Blackman is a senior tax partner in Blackman Kallick Bartelstein, a CPA firm specializing in closely held businesses. He has agreed to consult with readers of this column. Call his Tax Hotline, 312-2O7-1040.
Pavment June/July 1999