There are many benefits to incorporating a business —such as separating your personal identity and financial assets from that of your business, as well as giving your business credibility. But one of the main reasons why many owners decide to incorporate is because of that dreaded word— taxes.
Determining exactly how much your incorporated business can save through tax deductions depends heavily on which state you incorporate in – however, there are several tax advantages you can generally expect.
Business owners who incorporate can deduct “fringe” benefits, including health insurance, dental and retirement plans, travel expenses and other daily costs. For instance, the premiums that you or your employees pay on medical insurance are 100% deductible as long as you are incorporated, which is a huge help for many businesses—especially in light of the new Affordable Care Act.
Incorporation typically decreases the overall tax liability of your business by allowing you to deduct losses from your income tax. This benefit is especially valuable in the beginning stages of running a business, when income is not able to offset high initial costs and start-up expenses. This also means you can write off damaged or dated inventory.
Business Items & Equipment
If your business is incorporated, you may also be able to write off or partially deduct items used for “business purposes” that you’ve already paid for. For instance, the cost of a car or truck you use for work-related errands can be added as a tax deduction, as well as repairs, standard depreciation, and gas expenses associated with the vehicle.
Social Security Tax Deduction
With a corporation, earnings that are paid to an owner as a salary or personal income can be taxed. However, whatever money is left in the business for reinvestment or distributed to shareholders is not subject to Social Security tax. This can result in significant tax savings—15% of income earned.
Choosing a Corporation or LLC
Once you decide to incorporate, it is crucial to select an entity type that is right for you. Corporations and Limited Liability Companies (LLCs) have broad differences when it comes to tax benefits. Some tax breaks only apply to C-corporations, whereas others only apply to LLCs.
Before making the decision, it is best to research the differences between common entity types. For help on choosing the right entity for your business, visit the Incorporation Knowledge Center. Then learn about our step-by-step instructions on how to form a corporation or LLC with MaxFilings, the trusted source for online incorporation services.