BUSINESS ADVANTAGES AND DISADVANTAGES OF STOCKHOLDER REPORTING OFCORPORATE INCOME

Articles In This Section:

· Form of business and financing

· BUSINESS ADVANTAGES OF OPERATING AS A SOLE PROPRIETOR

· BUSINESS DISADVANTAGES OF OPERATING AS A SOLE PROPRIETOR

· BUSINESS FINANCING

· WHAT TYPES OF BUSINESS LOANS

· LOANS FOR THE BUSINESS

· A LINE OF CREDIT FOR THE BUSINESS

· How a Sole Proprietorship is Taxed

· BUSINESS ADVANTAGES OF THE PARTNERSHIP FORM

· BUSINESS DISADVANTAGES OF THE PARTNERSHIP FORM

· THREE RULES AS BUSINESS PARTNERS

· BUSINESS TAXATION

· BUSINESS CORPORATION

· BUSINESS DISADVANTAGES OF THE CORPORATE FORM

· BUSINESS CORPORATE FINANCING

· BUSINESS STOCKHOLDER ELECTION TO REPORT CORPORATE INCOME

· MAKING THE BUSINESS ELECTION

· HOW THE BUSINESS ELECTION IS LOST

· BUSINESS ADVANTAGES AND DISADVANTAGES OF STOCKHOLDER REPORTING OFCORPORATE INCOME

Tax sheltered fringe benefits. Owners of unincorporated businesses do not benefit from tax sheltered fringe benefits available to stockholder executives. Now such owners can incorporate to benefit from qualified pension plans, sick pay exclusions, accident and health insurance, and still retain the tax advantages of unincorporated operation. Your company can buy you an accident and health insurance policy and deduct premium payments. A sole proprietorship or partnership cannot deduct premium payments covering its owners except for reimbursement of overhead. A corporation can also pay your medical expenses without creating taxed income for you. Better timing of income distribution. If an electing corporation operates on a taxable year differing from that of its stockholders, it can time its distributions to cover two tax years.

Example: An electing corporation operates on a fiscal year ending January 31. Its five stockholders report income on a calendar year basis. By December 31, 1959, the electing corporation has earned $60,000. If it didn't distribute any of the $60,000, the entire amount would be taxable to the stockholders in 1960. The stockholders prefer to have the $60,000 spread over two of their tax years rather than have it all in 1960.

They accomplish this by paying a dividend of $30,000 on December 31, 1959. Thus, they have $30,000 taxable income from the electing corporation in 1959 and $30,000 in 1960 when the corporate year ends. Undistributed corporate income on January 31, 1959, when the corporate year terminates, amounts to only $30,000 because of the previous distribution of $30,000. Company business losses can be used to offset large personal business income. Large nonrecurring capital gain can be passed to stockholders without double tax—that is, once to the corporation and again when the gain is distributed to stockholders in the form of dividends. This advantage also can facilitate liquidation of a company without having to meet more technical rules of liquidation to avoid the double tax. Starting a new corporation with a fiscal year to postpone payment of taxes for a year. For example, you start your company with a fiscal year beginning February 1, 1960. You pick up income at the end of its year, January 31, 1961. Thus you do not have to report corporate income earned in 1960 until the due date of your personal 1961 tax return (April 15, 1962). Increased charitable contribution deduction. By combining corporate giving with your own, you can increase your maximum yearly charitable giving.

Example: Jones, sole proprietor, has a business income of $50,000. He gives $17,000 to his church. But he can only deduct $15,000 because of the 30% limitation (30% of $50,000, or $15,000).

If Jones incorporates and elects to report corporate income, he and his corporation can deduct up to $16,750. His company gives up to 5% of $50,000, or $2,500; he can personally give up to 30% of $47,500, or $14,250. By coordinating his and his company's contributions, he gets an overall deduction of