That's tax evasion. No doubt a few do it, but 99.9% don't. They just pay and pass the cost onto you.
Ok, you insist. Let me give you an example. You are about to start ABC corp. You intend to finance the corp with personal assets of 50k. This equity will eventually be matched by external funding, ie bank notes or SBC financing, but that is moot.
You have two choices. You can invest 50k in your business, and take out shares representing contributed capital. Or you can loan the business 50k with a note payable issued to you.
Now, 4 years later, your business is throwing off 15k/year income. You can extract that flow by repaying the note, with no dual taxation, as the flow of funds is not dividend, but repayment of the note. Further, the interest income is not subject to FICA. So the characterization of the income is alterated from ordinary income taxed at the highest possible rate in our present system to passive income taxed at a lower rate.
Only by carefully considering how you are going to extract the capital (exit strategy) can you prevent simple mistakes that cost you later in higher taxes.
Another example- Oregon has a personal property tax for business equipment. Jane Doe wants to set up a corporate structure. She contributes her office equipment (computer, postage meter etc) valued at 10k. The following year, she has an ugly form to fill out to compute the personal property tax due. If she had only leased the equipment at fair market value to her business, she could have deducted the business loss against her ordinary income (though technically should have include the rental income elsewhere). The important aspects of this transaction is the avoidance of an additional personal property tax and the recharecterization of ordinary income her business owning the equipment would have thrown off into rental income.
I'm not an attorney nor a cpa, so don't try this at home without the appropriate advice. But these are examples of how an individual can structure a new business entity correctly or incorrectly resulting in substantially differing tax burdens. And it is legal to work within the proscribed rules to avoid, not evade taxes.
You still haven't addressed a basic issue. If your clients are so wounded by corporate taxes, then why the heck do they choose that structure?
This is free market at it's finest. If corporate taxes were destructive, then why are there so many corporations? |
