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Articles Posted in Corporations

Everyone, from small business owners to independent contractors, knows there some extremely specific advantages to incorporating. Not only do you receive some protection in case of liability, since the business is held liable, instead of you – the individual owner – (although this depends largely on the circumstances, of course), but incorporating also sets you up to be eligible for plenty of tax breaks.

Since different types of corporations are taxed at varying rates, they are also eligible for many tax breaks that individuals are not. Without a doubt, sifting through the incorporation paperwork may help you quite a bit when filing your yearly federal and state tax returns. But overall, there are five main ways that you can save money on your taxes, simply by incorporating your business. So, you need to be aware of the following advantages when making any big decisions:

1) You Won’t Have to Pay Self-Employment Tax

Federal tax law provides favorable tax treatment for various “qualified” retirement plans by deferring income tax on contributions made by workers. The Internal Revenue Code (IRC) limits the annual amount that workers can contribute to qualified plans. Executives at large corporations have another option for retirement savings that allows them to make far greater contributions thanks to loopholes in the IRC. A bill introduced in the U.S. Senate earlier this year, the CEO and Worker Pension Fairness Act (CWPFA), would close these loopholes, resulting in higher taxes for executives.

What Is an Executive Retirement Plan?

The term “executive retirement plan” refers to certain deferred compensation plans that are not “qualified” under the IRC. They are not eligible for deferred taxation in the same way as qualified plans like individual retirement accounts (IRAs) or 401(k) plans, but large corporations have found ways to take advantage of tax deferrals.

Workers with qualified retirement accounts have an annual limit on contributions. Tax deferrals on contributions to 401(k) plans, for example, are limited to $19,500 per year. Some executive retirement plans, however, may allow unlimited contributions. A report by the Government Accountability Office (GAO), entitled Private Pensions: IRS and DOL Should Strengthen Oversight of Executive Retirement Plans, found that 2,300 corporate executives maintain around $13 billion in this type of account. Many of them contribute to these accounts after they reach their annual limit on qualified plan contributions.

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The federal Internal Revenue Code (IRC) allows taxpayers to deduct various business expenses from their income for the purposes of computing their total tax bill for a given year, with numerous exceptions. Section 280E of the IRC, for example, prohibits deduction of expenditures involved with “the illegal sale of drugs.” More than half of all U.S. states allow the medical use of marijuana to some extent, but it remains a Schedule I controlled substance under federal law. This is causing problems for businesses that are complying with state cannabis laws. In late 2018, the U.S. Tax Court ruled that a California medical marijuana company could not deduct millions of dollars in business expenditures. The company has announced that it intends to appeal this decision on business tax deductions.

IRC § 162 allows taxpayers to deduct all “ordinary and necessary expenses” that they pay or incur as part of their “trade or business,” subject to various exceptions scattered throughout the statute. The exception for the “illegal sale of drugs” applies to any substance included in Schedules I or II of the federal Controlled Substances Act (CSA), or similarly prohibited by the laws of the state in which the taxpayer does business. The CSA classifies marijuana (or “marihuana”) in Schedule I, which requires a finding that a drug has “no currently accepted medical use in treatment.”

California law takes a substantially different view of marijuana, as do the laws of at least thirty-one other states, the District of Columbia, and several U.S. territories. In 1996, California became the first state in the U.S. to allow the use of marijuana for medical purposes, after voters passed Proposition 215, also known as the Compassionate Use Act of 1996. A 2005 decision by the U.S. Supreme Court, Gonzales v. Raich, held that federal law may continue to criminalize marijuana production, distribution, and possession even when state laws allow those activities. Conflicts between federal and state marijuana laws are an ongoing matter of dispute.

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Creating a business entity for your business, such as a corporation or limited liability company, offers a wide variety of benefits. State law governs the formation and governance of these organizations, while federal law governs the aspects that relate to federal income taxes. The Internal Revenue Code (IRC) recognizes two types of corporations:  “C” corporations and “S” corporations. Choosing the form that is right for your business depends on multiple factors, including the existing structure of your business and your goals with regard to matters like financing and growth.

What Is a Corporation?

The primary purposes of a corporation are to allow the owners of a business to operate it as a single legal entity, while also protecting those owners from various forms of liability. A corporation has the authority to enter into contracts and conduct other activities in the same way that real human beings can.

The owners of a corporation are known as shareholders. Their ownership is represented by shares in the corporation, also known as stock. Shareholders are nominally in charge of running a corporation, but they usually delegate this duty by electing a board of directors. The directors further delegate operations to officers, such as a CEO or president, a treasurer, and others. Shareholders may receive a portion of a corporation’s profits in the form of dividends. Continue reading

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