The Biggest Mistake With C Corporations and How to Save Taxes Using the C Corporation Double Tax
July 1, 2010 by admin
Filed under Prior Year Taxes
The Biggest Mistake With C Corporations and How to Save Taxes Using the C Corporation Double Tax
When used correctly, C Corporations are a great way to supercharge a tax strategy. I find that when my clients make the most of their C Corporations, they reduce their taxes by a minimum of ,000 every year.
- The Biggest Mistake With C Corporations -
The key to saving ,000 in taxes every year is knowing how to use a C Corporation correctly. When I meet with prospects and review their prior year tax returns, it’s not unusual that I find a C Corporation that isn’t being used correctly. In these cases, the C Corporation is not saving any taxes and in some cases it is actually creating more taxes! So what makes these C Corporations not work? These C Corporations do not save taxes because the wrong type of business is in the C Corporation.
Only certain types of businesses will generate tax savings by operating as a C Corporation. The type of business that does work is what I refer to as a support business or a secondary business. Now, you may be wondering, what is a support or a secondary business? Sometimes it’s easier to define what it isn’t.
The Types of Businesses That Don’t Save Taxes in a C Corporation:
Primary Operating Business. This is a business that creates the main source of cash flow for the owner. The owner relies on this cash flow for living and other personal expenses. The primary operating business is how the owner makes a living. In this type of business, it is critical that the owner be able to get cash out of the company in a very tax efficient way. While it is possible to get cash out of a C Corporation, it becomes inefficient from a tax standpoint to do so with large amounts of cash. Bottom line: if you rely on the cash from your business to pay for your living expenses, that business is not ideal for a C Corporation.
Investment or Rental Real Estate Business. There are several reasons why this type of business doesn’t work in a C Corporation. I’ll share the top two reasons.
First, this type of business involves assets that appreciate. C Corporations do not have a “special” lower tax rate for capital gains (which are generated from appreciated assets). Individuals do have a special capital gains rate so that benefit is completely lost in a C Corporation.
Second, the income generated from these investments is often subject to a special (additional) tax in C Corporations called a personal holding company tax. This tax only applies to this type of income and only in a C Corporation. The tax effectively eliminates the lower tax rates that a C Corporation normally has. This tax was specifically put in place to keep taxpayers from putting investment assets in a C Corporation as a way to pay less tax on their investment income.
The Type of Business That DOES Save Taxes in a C Corporation:
Now that we have eliminated primary operating businesses and investment businesses from the types of businesses that do not save taxes in a C Corporation, what is left? What is left is secondary or support businesses. These are best defined as businesses that generate a modest amount of profit (no more than ,000 annually) and the cash flow that is generated is not needed by the owner to pay for living or personal expenses.
By far the biggest objection I hear anytime I bring up a C Corporation is…
But What About the Double Tax? Sometimes just the mere thought of paying a double tax sends people running in fear. Fortunately, I’m not afraid of the double tax and I actually have a strategy where the double tax can work to reduce my clients’ taxes.
What Is the Double Tax? The double tax is this:
First tax: A C Corporation pays its own tax on its net income. This is the first tax.
This is a great tax reduction strategy! Because a C Corporation pays its own tax, it has its own tax rules and you can legally use these rules to reduce your taxes.
Second tax: A C Corporation can use the cash it has after paying its own tax to pay dividends to its owners. When a C Corporation pays dividends to its owners, the owners pay tax on that dividend. This is the second tax.
At first glance, which is usually the only look most people (including CPAs) give a C Corporation, it seems that the double tax is the worst case scenario when it comes to tax planning. So many are surprised when I share this:
It Is Possible to Pay Less in Tax Even With a Double Tax!
Let’s take a look at how the C Corporation double tax can play out:
First tax = 15% A C Corporation pays 15% tax if it has net income of ,000 or less.
Second tax = 15% An individual pays 15% tax on dividends.
Total double tax = 30% (The double tax can end up being a little less than 30% but to keep things simple for this example, 30% will be used).
This means if an individual is in a 35% tax bracket, it is possible to pay less tax by incurring a double tax that totals 30%!
Tom Wheelwright is not only the founder and CEO of Provision, but he is the creative force behind Provision Wealth Strategists. In addition to his management responsibilities, Tom likes to coach clients on wealth, business, and tax strategies. Along with his frequent seminars on these strategies, Tom is an adjunct professor in the Masters of Tax program at Arizona State University. For more information please visit http://www.provisionwealth.com
Prepare Prior Year Taxes Now
The Biggest Mistake With C Corporations and How to Save Taxes Using the C Corporation Double Tax
November 4, 2009 by admin
Filed under Business Taxes, Tax Articles
Comments Off
- The Biggest Mistake With C Corporations -
The key to saving $10,000 in taxes every year is knowing how to use a C Corporation correctly. When I meet with prospects and review their prior year tax returns, it’s not unusual that I find a C Corporation that isn’t being used correctly. In these cases, the C Corporation is not saving any taxes and in some cases it is actually creating more taxes! So what makes these C Corporations not work? These C Corporations do not save taxes because the wrong type of business is in the C Corporation.
Only certain types of businesses will generate tax savings by operating as a C Corporation. The type of business that does work is what I refer to as a support business or a secondary business. Now, you may be wondering, what is a support or a secondary business? Sometimes it’s easier to define what it isn’t.
The Types of Businesses That Don’t Save Taxes in a C Corporation:
Primary Operating Business. This is a business that creates the main source of cash flow for the owner. The owner relies on this cash flow for living and other personal expenses. The primary operating business is how the owner makes a living. In this type of business, it is critical that the owner be able to get cash out of the company in a very tax efficient way. While it is possible to get cash out of a C Corporation, it becomes inefficient from a tax standpoint to do so with large amounts of cash. Bottom line: if you rely on the cash from your business to pay for your living expenses, that business is not ideal for a C Corporation.
Investment or Rental Real Estate Business. There are several reasons why this type of business doesn’t work in a C Corporation. I’ll share the top two reasons.
First, this type of business involves assets that appreciate. C Corporations do not have a “special” lower tax rate for capital gains (which are generated from appreciated assets). Individuals do have a special capital gains rate so that benefit is completely lost in a C Corporation.
Second, the income generated from these investments is often subject to a special (additional) tax in C Corporations called a personal holding company tax. This tax only applies to this type of income and only in a C Corporation. The tax effectively eliminates the lower tax rates that a C Corporation normally has. This tax was specifically put in place to keep taxpayers from putting investment assets in a C Corporation as a way to pay less tax on their investment income.
The Type of Business That DOES Save Taxes in a C Corporation:
Now that we have eliminated primary operating businesses and investment businesses from the types of businesses that do not save taxes in a C Corporation, what is left? What is left is secondary or support businesses. These are best defined as businesses that generate a modest amount of profit (no more than $75,000 annually) and the cash flow that is generated is not needed by the owner to pay for living or personal expenses.
By far the biggest objection I hear anytime I bring up a C Corporation is…
But What About the Double Tax? Sometimes just the mere thought of paying a double tax sends people running in fear. Fortunately, I’m not afraid of the double tax and I actually have a strategy where the double tax can work to reduce my clients’ taxes.
What Is the Double Tax? The double tax is this:
First tax: A C Corporation pays its own tax on its net income. This is the first tax.
This is a great tax reduction strategy! Because a C Corporation pays its own tax, it has its own tax rules and you can legally use these rules to reduce your taxes.
Second tax: A C Corporation can use the cash it has after paying its own tax to pay dividends to its owners. When a C Corporation pays dividends to its owners, the owners pay tax on that dividend. This is the second tax.
At first glance, which is usually the only look most people (including CPAs) give a C Corporation, it seems that the double tax is the worst case scenario when it comes to tax planning. So many are surprised when I share this:
It Is Possible to Pay Less in Tax Even With a Double Tax!
Let’s take a look at how the C Corporation double tax can play out:
First tax = 15% A C Corporation pays 15% tax if it has net income of $50,000 or less.
Second tax = 15% An individual pays 15% tax on dividends.
Total double tax = 30% (The double tax can end up being a little less than 30% but to keep things simple for this example, 30% will be used).
This means if an individual is in a 35% tax bracket, it is possible to pay less tax by incurring a double tax that totals 30%!
Tom Wheelwright is not only the founder and CEO of Provision, but he is the creative force behind Provision Wealth Strategists. In addition to his management responsibilities, Tom likes to coach clients on wealth, business, and tax strategies. Along with his frequent seminars on these strategies, Tom is an adjunct professor in the Masters of Tax program at Arizona State University. For more information please visit http://www.provisionwealth.com
Income Tax Software For Your Corporation
October 16, 2009 by admin
Filed under Tax Articles
Income tax filing preparations can be a very complex process. There are different tax situations that entail different treatments. You will need the necessary know how and skills to be able to prepare your income tax for filing. This complex situation can be even more compounded by the fact that you need to do income tax preparations for a corporation or business. In this case, the already complicated process of tax filing preparation can be come even more complex.
First of all, a corporation has special interests that need to be met when it comes to tax filing preparations. For one, you have to be extra careful about tax liability which can come back to haunt your business in the event that the tax filing preparations were not done properly. Next, especially if your business has high visibility and entails by in from shareholders, you will need a tax filing system that is transparent and can be fully accountable.
All these added complications on an already complex procedure can be too much of a burden. This should not be the case though since your business or corporation should devote its time and energy on more lucrative avenues to increase the bottom line.
In this case, it is more prudent to acquire the services of a third party business solutions provider in form of a certified public accountant or a separate firm devoted to helping other corporations with their tax filing preparation needs. However, you must be very diligent in choosing the right third party to contract because outdated methods of accounting can very much put your business at risk.
It is time to embrace the latest in technological advancements when it comes to corporate income tax software programs. It is hardly prudent to rely on outdated spreadsheets that are prone to error. Not to mention that these old method tools may not be enough to ensure the proper risk management your business deserves.
The beauty of these advanced and sophisticated corporate income tax software programs is that it manages your risks properly and that is what is most important in a business to be able to ensure continued growth. The downside is that if you are not a large corporation, it may not be too practical to invest in a costly corporate income tax software program that you will use only once a year. Not to mention that you will need to add additional maintenance measures plus include a measure of learning to be able to utilize these corporate income tax software programs well.
In this case, just choose a third party solutions provider that uses state of the art corporate income tax software programs so you won’t have to make such a huge investment.
People who are operating a business have to make sure there is a balance between the money that is used for expenses with the amount of cash that is coming in. The only way to know if this is doing well is when the figures show that one is in the green.
Regardless if business is doing well or not, the person is obligated to report the income to the government. The accounting department of the company can do the work or an outside consultant can review the books so a report can be made and submitted.
One way to cut cost and being able to know the progress of the business is by investing in computer software. By plugging in the necessary values such as the earnings, expenses, stocks, salaries and other details, the person will know what areas to improve on to keep this going.
When it is time to file the income tax, another program can be used so that this can be done just as easily as monitoring the business. Here are a few of those that can be used to make this happen.
1. Since most businesses use Windows, it is only right to recommend Ufile, which allows the entrepreneur or an accountant to manually enter the required information. The income tax report can be submitted online instead of sending it via snail mail to the IRS.
2. People who use Macintosh can try using Taxtron since there is also a similar version to those who have Windows. Given that this is not for personal use, this is going to cost the company a certain amount of money in order to compute for corporate income tax.
3. Many are already aware that Turbo Tax can be used to file for personal income tax. There is also a corporate version available, which allows small and large businesses to do the same thing. The program can be accessed by logging into the company’s website or going to a computer store to get a CD.
4. QuickTax is another corporate program that can be used to compute income tax. The beauty of this software is that it has the ability to compute various calculations at the same time producing results in a short period of time.
It is not that hard to learn how to use the income tax review software since the person will be guided from beginning to end. The individual will just have to choose which one to buy so this can be used for the business.
Low Jeremy maintains http://Tax-Software.ArticlesForReprint.com. This content is provided by Low Jeremy. It may be used only in its entirety with all links included.
Tax Software and Company Corporation Tax Return
September 20, 2009 by admin
Filed under Tax Articles
Company Accounting Software.
All types of business accounting software produce a net taxable profit being the difference between sales income received and purchase expenses. The company accounts package often does not include capital and tax allowances on fixed assets which are essential elements to enable final tax accounting which the production of the tax liability.
Since tax allowances change then not all accounting packages cope well with this aspect as either it is ignored and any claims for capital allowances need to be input manually which often requires knowledge of the tax system. In any event many systems require the current year tax allowances to be input.
Tax accounting packages do exist where the current tax rates and rules issued by the taxation authority for a specific financial tax year. Such tax accounting software either has to include an upgrade service to incorporate the different tax rules that apply each year or a new package has to be purchased for each new financial year.
Every quality tax accounting software package should calculate the corporation tax liability which is one of the most significant costs of every business. If the accounting software does not produce an automated calculation of the tax liability then the tax due has to be entered manually usually by journal entry.
Manually entering the tax liability is a function frequently best dealt with by an accountant since the transaction also involves the final completion of the company accounts and potentially journal entries to account for distributions from the after tax profit and retained profits.
Vat Tax Return Software.
It would be unusual to find a company accounts package that did not automatically generate the quarterly figures for the vat return since almost all companies are vat registered.
The vast majority of companies have a sales turnover which exceeds the vat threshold limit at which vat registration is obligatory; most companies sales turnover exceeds this threshold at which point vat registration is mandatory.
The accounting software must be capable of satisfying the requirements of the taxation authority which in regard to a vat return includes the provision of an accounting audit trail of financial transactions.
Tax Software and CT600 Corporation Tax Return.
In the UK a private limited company has to complete a corporation tax return each financial year. Known as the CT600 companies with a sales turnover which qualifies as a small company can complete the CT600 short return.
Completing even the short version of the CT600 tax return is a specialist accountancy area which few non accountants are familiar with or find easy to deal with since it demands intimate knowledge of the tax system. Completing the corporation tax return can be a daunting task for a non accountant including several hours study of the accompanying notes. It is no simple task for many accountants who do not specialise as a tax accountant.
Most accounts packages do not include tax software encrypted within the packages to produce the corporation tax return but may include an online feed to assist in the submission of ther company tax return.
Using the right tax software the CT600 corporation tax return can be completed automatically.
To do so the company accounts package has to include all the relevant tax rules and rates applicable for fixed assets and the calculation of the tax liability. Both tax rates and the rules in which tax is collected are frequently changed. It is in fact unusual if the tax rules are not changed in some part every single year. Suitable tax software is essential to perform this annual process.
The tax accounting takes the tax rates and rules automating the work of a tax accountant to produce the tax liability. The term tax software indicates automation based upon data input which the computer package then processes to produce the desired output. Company tax software produces the tax requirements of the company including both the corporation tax liability and completion of the tax return.
DIY Accounting specialises in producing tax accounting software for company accounts and self employed business that incorporate tax software to automate tax returns. Simple tax software designed to produce accounting solutions and CT600 corporation tax return to enable non accountant business clients to complete their tax affairs without recourse to the services of a specialist tax accountant.
