Which Corporation Claims the Biggest Tax Benefits
Do you want to start a hustle or a full-fledged business? Either way, it involves legal and tax ramifications. So, which corporation claims the biggest tax benefits? Zakir CPA gets to the core with a clear business guide.
From a construction business to a candy store, you must identify your business as a legal entity. Strategically selected corporation types give protection on personal and company assets. You must know what cuts you a better slack in terms of tax advantages.
What are the corporation types in the USA?
The Internal Revenue Service (IRS) categorizes corporations for taxation purposes. Also, this classification defines your company’s liabilities. Here goes a list of business entities.
3. Limited Liability Company (LLC)
4. Limited Liability Partnership (LLP)
5. Professional Corporation (PC)
6. Professional Limited Liability Company (PLLC)
Now, our top tax advisors in NY simplify the jargon for you. Let’s hop on.
C-Corp & its tax perks
Subchapter C of the Internal Revenue Code regulates C-Corporations. C-Corp is easy to form and there is no limitation on investors, like foreign or domestic or numbers.
Double taxation is a huge turn-off. However, one can reinvest profits in the company at a lower corporate tax rate. Besides, business owners can take a salary that is not taxed at the corporate rate. Moreover, medical premiums, fringe benefits, and charitable contributions enjoy deductions and write-offs.
On the flip side, C-Corp is subject to double taxation. So, both the Corporation and the owner pay taxes at the same time.
Subchapter S of the Internal Revenue Code controls S-Corporations. S-Corporation is a small business entity with a maximum of 100 shareholders.
The S-Corp status allows businesses the corporate benefits with the tax-free privileges of a partnership.
As a tax-paying entity, it pays no federal taxes. This is the biggest tax benefit. In the rising years of a company, this tax privilege gives an immense boost.
S corp shareholders can work for the company and earn salaries. They can receive tax-exempt dividends if the distributions remain below their stock basis. Also, no hostile tax effects hamper your transfer of interests or adjustment of property basis.
However, S-Corporation delivers no protection on personal assets. The tax rate depends on each individual’s income.
S-Corp & its tax privileges
LLC & its tax favors
A limited liability company (LLC) guarantees protection from personal responsibility for its liabilities.
Across the states, the LLC formation requirements widely vary. In New York, the owner must publish six consecutive weeks in a local newspaper, following the initiation of an LLC. It costs a pretty penny.
LLC owners get taxed on their individual income from LLC.
That being said, an LLC could be dissolved upon the death or bankruptcy of a member.
LLP & its tax gains
A limited liability partnership (LLP) has more than one member.
This flexible tax entity allows partners to benefit from cooperation by removing their vulnerability to the actions of other partners.
Shared office space, employees, etc reduce costs to realize more profits. It lets partners in and out at times.
Again, the LLP requirements vary across the states.
In the case of failed partnerships, creditors cannot go after a partner’s personal assets or income.
LLP members are taxed on their individual income from LLC.
Reputation-based professional businesses like law firms, accounting firms, and wealth management agencies tap into LLPs. LLCs and LLPs are preferable to a corporation.
PC & its tax rewards
A professional corporation (PC) strictly involves professionals. Doctors, lawyers, architects, CPAs, engineers, psychologists, etc can initiate it.
Professional corporations are incorporated within the state. They grant professionals the perks of corporations. Simultaneously, personal liability goes way down.
PCs are taxed similarly to regular corporations, a flat 21%.
However, professional malpractice results in severe consequences. It skyrockets the personal liability of the accused professional.
PLLC & its tax blessings
Licensed professionals can form a professional limited liability company (PLLC). Again, certified lawyers, doctors, architects, engineers, CPAs, chiropractors, etc are allowed to launch a PLLC.
Individual members pay taxes.
PLLCs separate the individual from the business entity. So, the individual goes scot-free from personal liabilities for the corporation’s debts and lawsuits.
Nonetheless, a PLLC often fails to protect you from your own malpractice. Therefore, you better carry malpractice insurance even if you form a PLLC. But you are not responsible for malpractice committed by your business partners.
Buying real estate under LLC or transferring properties to LLC
Q 1: Do I buy real estate property under my name or corporation or LLC?
Effectively, LLC protects personal assets such as cars, houses, the title of the property, etc. if you buy real estate under your name, your tenants can access your information. They can definitely find out your whereabouts, professions, and living place as well.
Thus, tenants can assess your monetary and legal strength. This valuable information could provoke them to bring lawsuits against you in case of perceived weakness.
However, people are unlikely to sue corporations or huge brands such as Coca-Cola or Apple.
Q 2: How to transfer my name to LLC?
Despite transferring the ownership, you are responsible for the mortgage payment. If you stick to the mortgage obligations, your lender could allow you to relocate your property title to an LLC. here goes the ownership title transfer process.
a. Launch an LLC.
b. Get a Tax ID Number and open a bank account in the LLC’s name.
c. A quitclaim deed describes that you are passing the property to your LLC. The quitclaim never guarantees that the title is good or you own the property.
d. Fill out the warranty or quitclaim deed form. here, you are the grantor and the LLC is the grantee.
e. As a grantor, you must sign the deed. Statewise, you might have to sign it in front of witnesses or a notary.
f. Record the deed as it creates a public record of the property transfer.
g. In the case of rented property, you need to amend the lease. So, it adequately reflects the LLC as the landlord, and not you.
Q 3: Do I use the same LLC for multiple real estate properties?
Initiate one LLC for each property. An individual limited liability company should own only one property. Then, it must refrain from engaging in any other business activity.
As a “disregarded entity”, LLCs protect the owner’s personal assets from all business liabilities. LLC’s profits and losses flow through to the owners and are subject to their individual taxes. It is a great business choice for liability protection, soliciting minimal formality.
Q 4: What can I write off if I have an LLC?
Limited liability companies (LLCs) can write off several expenses on their taxes. Hence, they can reduce the amount of taxes. “Deductions” is what the IRS calls these write-offs. Zakir CPA outlines multiple fronts for LLC deductions.
LLCs can write off registration fees, lawyer fees, research fees, etc. There goes a $5,000 direct deduction in the first year. The rest is amortized over 180 months.
Home office deductions
You are allowed to deduct utilities like water, repair, maintenance, condition, internet, etc. First, you must strictly designate the room or place for business. Then, calculate the square footage of the home office. This office area proportion affects all other deductions.
Charities are good for taxes. Up to 10 percent of its taxable income can be deducted.
Business insurance is deductible. For example, professional liability insurance for a therapist would be deductible.
On the year of the purchase, the Property purchased for the LLC goes off from taxes.
Meals & entertainment
You can write off half the cost of business-related meals and entertainment. So, employee meals can be deducted in full.
Here, deductions go two ways: milage and depreciation. Per business mileage, you can deduct 0.58 cents. Vehicle can be amortize over 5 years in straight line or double declining method.
You can write off ads expenses on television, newspaper, printing, etc. You need not amortize or depreciate.
Transfer LLC to S-Corp
LLC must pay 15.3% self-employed tax on all earned income. However, you can avoid it by converting the LLC into an S-Corp.
Deductions for new businesses
Insightful business owners can lower their taxes by claiming reasonable deductions. Our top tax deduction tips reduce the tax amount you owe. So, what business expenses can I deduct
Meal: All food and drink are subject to 50 percent deductions, given proper documentation that describes the date, time, relationship, and charges.
Phone & internet: So, deduct the percentage of your business use of phone and internet. For example, you can altogether write off business-related internet usage for the year.
If 30 percent of phone calls go into business, you can outright deduct 30 percent of your phone bill.
Business equipment: Businesses may write off even the total price of qualified business equipment from their taxes in the same year. Equipment stretches from heavy machinery to computers. Also, it includes software programs, lights, and cameras for your business.
Licenses & subscriptions: Businesses must collect a host of licenses and permissions. Luckily, most of these are deductible expenses. Licensing ranges from basic operational licenses to complex environmental ones.
The subscriptions must be related to your industry. For instance, a CPA Journal subscription is deductible for a CPA, but not a daily newspaper.
Furniture: Desks, couches, chairs, tables, etc are depreciated in 5-7 years. If the furniture has a lifetime of fewer than 20 years, you can leverage depreciation in the same year of its purchase.
Legal & professional fees: Businesses can deduct these fees only if they qualify as “ordinary and necessary” expenses. This qualification requires a good deal of assessment.
Also, organizational costs include fees for attorney services tailored to organize your business, before the end of your first tax year. Contact our best CPA in Bronx for a detailed analysis of your legal deductibles.
Auto: When you travel to meet clients, the expenses can be deducted in two ways – mileage and depreciation. Besides, business-only cars are subject to deductions up to their entire cost of ownership and operation with some limitations.
Transport & travel: Transport expenses involve the costs of driving your car, van, motorcycle, etc. It includes ride-share and ride-sourcing such as Uber. Also, you can take into account flights catching a train, taxi, boat, bus or other vehicles.
You may deduct travel costs of staying in a hotel, motel, or similar accommodation and meals.
Contractor: If the worker is paid a specific amount per job, they fall under the contractors or freelancers category. The number of contractors, frequency of payments. And their locations affect your tax plans too.
Retirement plan: Your deduction is liable to restrictions if you are covered by a retirement plan at work and your income exceeds certain levels.
Get your deduction in full if you have no retirement plan at work.
HSA: If your health insurance comes with deductibles in the four figures, you are most likely eligible for a Health Savings Account (HSA). Bounties of benefits await if you can handle high deductibles.
HSA allows you to use pre-tax income for uninsured health expenses. A qualifying high-deductible health plan helps you contribute to an HSA.
Home office deductions: Use a portion of your house, apartment, condominium, mobile home, boat, or similar structure for your business. This practice qualifies for the home office deductions.
However, a remote employee does not qualify for the federal home office tax deduction. But you may still claim some state tax deduction.