The Business Owners' Tax System

Why a Corporation Helps Save You Taxes

The following tables provide a list of the tax rates for individuals and corporations:

If you examine them closely, you will see at least one glaring contrast. The individual making $49,000 per year is in the 28% percent bracket, while a corporation that earns $49,000 is only in the 15% bracket. That's a potential 13% tax rate difference worth $6,370 if you organize your finances to take advantage of this one little item.

But, that's just part of the story. An individual who makes $49,000 in salary pays taxes on almost the entire $49,000. However, a business can first deduct its operating expenses, and only has to pay taxes on what's left. The corporation acts as a filter that is used to reduce the corporation's taxable income by utilizing all the tax deductions afforded by the tax code.

Basic corporate deductions include telephone expenses, equipment (faxes, computers, photocopy machines, telephones), automobile gas, repairs and insurance, travel, entertainment, seminars, etc. Do you have any of these types of expenses? Sure you do!

The difference is that businesses subtract these expenses first, then pay taxes on the balance. You, as an individual taxpayer, pay taxes on the greater amount, then pay for these expenses (you call them living expenses) out of what's left. Did you ever wonder why there's not much left for living at the end of the month? Now you can see why. The question is: Are you willing to do something about it?

Starting a Business

Keep in mind that there are two steps here; first you must start to shift your efforts from earning a salary to earning more money through your business. There are many ways that you can do this.

For instance, you can start with your own business concept. Maybe you've already got an idea that you want to pursue. It could be a product or a service or something along the lines of arts and crafts. It doesn't have to be sophisticated or high tech; it just has to have a profit motive.

Secondly, you may have something that you already enjoy doing as a hobby. You can probably convert that activity into a viable business enterprise. Just remember that there are rules that you must follow to ensure that your new-found business is not treated as a hobby by the I.R.S, and the deductions voided.

Thirdly, you can get into a network marketing business. There are many available, some of which don't require a lot of money to get going. The older types of network marketing schemes available in the past made little money for anyone except the original promoters. Today, Wave 3 network marketing companies offer legitimate profit potential and significant residual income streams. I will be happy to make a recommendation if you like.

Lastly, you may be able to sell the services of your new company to your employer. Suppose for example that there is some aspect of your job that you think can be done less expensively or more efficiently on an out-sourced basis. It could be anything really, clerical services, database management, sales or marketing. Instead of working overtime and on weekends to make more fully taxable income, your company could generate revenue by providing the "outsourced" service to your employer, and, in doing so, you could take advantage of the tax deduction benefits.

And the nice thing is that any of the above can be done on a part-time basis. You can maintain your current job (and income) while you grow your new business.

Maximize Tax Deductions

The next step is to learn to maximize your deductible expenses. The items listed above are only a few of the many deductions that are available. We will be going into more advanced topics later.

One of the best ways to start this process is to review your current expenses and see if there is a way to convert these expenses to business expenses. Start with your checkbook; list all of the expenses that you pay each month on a piece of paper. Next, go through your credit card bills for the last year and list them. Next, go through your cash receipts and see where your cash was spent.

Now, having done that, you want to see which of these expenses can be converted into business expenses. For instance, I'm sure that you spent money on your automobile lease or note payments, gas, insurance, repairs, etc. In many cases, a portion of these can be converted to business expenses, if they are properly documented. Then, take a look at your phone bill. Some of this can be converted. The same is true of travel, meals and entertainment. And work your way down the list. The key is not to add additional expenses just because they are deductible, but rather to convert those things that you are already spending money on into legitimate business expenses.

Keep in mind, that the I.R.S. has specific rules concerning each kind of deductible expense. These rules must be followed. It is imperative, therefore, that you work closely with your accountant to insure that you are in compliance with these rules. THERE ARE STIFF PENALTIES IF YOU FAIL TO DO SO. Take the time to do it right, and if you have any questions, please sign up for a complementary tax strategy session with Pathfinder Business Strategies.