OcTaxLaw.com

Is it less taxing to incorporate?

Some companies may seem to escape death, but they will ever be able to escape taxes. That doesn’t mean there aren’t some tax benefits out there, though, that only the corporations are getting. Companies are tempted to incorporate for a number of reasons, but more and more often, taxes are the main motivator. But why?

Well, it’s important to note right away that incorporation only means tax benefits for some companies. For others, taxes might actually become a bigger problem than they were before. However, potentially, you have a lot to gain in what you won’t be paying in taxes to the government by incorporating. There are a few basic tax benefits that corporations often rely upon.

The first one is tax deferral. All this means, really, is that a company can keep more of its earnings. How can this be? When a company becomes a corporation, it becomes a separate entity of its owner and thus adheres to different rules than it did before. Typically, an owner must pay taxes directly to the government on his or her net income. But if that same owner has a corporation on his or her hands, it’s an entirely new ballgame. The corporation has different tax rates than its owner! Depending on the state, a corporation will have to pay little to no income tax. You can expect that the income tax of a corporation will be significantly lower than a personal income tax.

This may all sound very quaint and appealing, but there’s more to the story. The grass isn’t necessarily greener on the other side because of a nuisance called double taxation. Double taxation happens when both the shareholder and the corporation are taxed for various profits and gains. Especially when a corporation liquidates, this is a problem. (As new dividends make themselves known.) There are ways to resolve the double taxation dilemma, but it does take quite a bit of thought and planning.

Whether you’re running a company or a corporation, you must think about taxes in the long term. Don’t just plan for this year and next think far into the future and foresee problems like double taxation. As you consider the tax benefits of incorporation, make sure to also consider the disadvantages and added complications. If you want to get the best bang for your buck when you incorporate, you must play an active role in the process of turning your company into a corporation. And that means you can’t take for granted the promise of tax benefits.

Also keep in mind that tax law is ever-changing and tax benefits that generations before you had may be nonexistent today, while new benefits may take their place. It’s advisable to keep up to date about what your state legislatures are coming up with from year to year. Because each company has its own personality and ambitions and of course net profits, some tax benefits may be more disposable than others. The only appeal of tax benefits is that a company retains more of its earnings, so if incorporation is costing you money in other areas, you will want to note this. It’s important to weigh all the costs and benefits against each other!

If you are looking at making a quick hundred-thousand on real estate flipping, you may find it is quick, but not as lucrative as you thought.

With housing prices on the rise across the nation, flipping has become the hottest investment trend. You buy a property and quickly resell it at a higher price.

Most people even believe flipping to be more lucrative than the stock market. Plus, you get the rush of making a deal. Plus there is a physical object to look at to judge your investment by.

But if you aren’t careful when flipping that real estate, your investment strategy could be a party that the IRS attends.

Bill Rucci of Rucci, Bardaro and Barrett says that many of today’s real estate investors are completely uninformed when they begin their transactions.

“There is a huge misconception on part of some people who think they can buy a residential home, not necessarily their personal residence, fix it up and sell it; and then get what we used to call the old rollover provisions, where you used the money you made to buy another property for more than what you sold,” explained Rucci.

But there are two problems with that approach. “One, that rule existed for personal residences only; and two, it doesn’t exist anymore,” he said.

The rollover rule was replaced in 1997 with current law that allows for the tax-free sale of personal property in many cases. This works great if you are selling your primary residence after living in it for many years, but if you’re selling a house you haven’t lived in, your in a different group. The residence will be considered an investment property, and the tax considerations are completely different and more costly.

“We have tens of thousands of people getting into real estate,” says Mark Zilbert, a Realtor. “The majority of buyers understand that they can flip for a profit, understand what it means dollarwise, but they don’t understand that taxes could reduce just how much of a profit they make.”

Instead of running a fast game, a tax-smart flipper could benefit from a slower investment pace.

Investment profit, whether stocks or real estate, is considered capital gain and is taxed at two levels. The tax rate depends on how long you own the property.

Keep it for less than a year and your short-term gains will be taxed as ordinary income. That means you could be facing up to 35%. If you hold the property longer than a year, you will pay a long-term capital gains rate that maxes out a 15% for most taxpayers.

Not all flippers have a year to wait. Not even for taxes.

But you must beware how much you flip.

When you complete several transactions in a short time, the IRS could consider your transactions as a business rather than an investment strategy. Then you have to pay the higher ordinary income tax rates.

The IRS is watching flippers closely.

“The IRS is out looking for these transactions,” says Rucci. “If the IRS decides your investment is a business; that what you are doing is to earn a living, the property changes from a capital asset to a means of producing income that’s subject to ordinary tax rates, plus the additional burden of another 15.3% in self-employment taxes. That is what the government is pushing for.”

Tax costs won’t deter many flippers. One way of looking at it is that you don’t pay taxes unless you make money.

The easiest way to pay less tax on a flip is using the capital-gains technique. Simply hold onto the property for more than a year and pay the long-term capital gains. You can try to time your real estate sale during the same tax year you suffer a loss on another long-term asset. Then use the loss to offset your gain.

If you want to avoid taxes altogether on the property, simply move in. You must live there for two years out of the last five years. When you sell it, up to $250,000 of your profit is excluded from taxation, double that if you are married and file jointly.

You can also defer paying taxes on your real estate gain by exchanging the property for another property, known as a like-kind or Section 1013 exchange.

No matter what you do, make sure that you keep good records. You can really benefit from proper documentation when claiming real estate investment deductions.

Home Loans and their high rate of interest dig a hole in the pocket of homeowners. On top of that the monthly payouts have to be juggled with the regular home expenses which are equally essential if not more. Maintaining a comfortable finance graph without going into further debt is a concern that worries all prospective homeowners making them wary of Home Loans.

While there are many banks and firms offering multiple fiscal plans to these prospective buyers, there is a need for expert advice on Home Loans. It is imperative that you know what the laws of the state are and what the various options available are so as to make your loan journey smooth and easy. Home Loans also have multiple tax implications and benefits and with the help of expert guidance one can map out a monthly finance plan that will not hinder savings and benefit in the long run.

The specialists work closely with the homeowners to capitalize on Home Loans or liability on lines of credit. With the help of their professional understanding and guidance homeowners can save by lowering the tax liability. The homeowners can score brownie points every month by using the home loans for credit requirements. Banks allow an almost hundred percent deduction on their rate of interest on home loans. They bid comparatively lower rate of interest on the home loans than on credit and debit cards issued.

Moreover, the rate of interest on home loans is typically lower than that on the unsecured loans. Therefore, every time a homeowner borrows home loans on home mortgage or mortgage of any other self-owned property. The banks are assured to provide the homeowner with a lower rate of interest with higher resulting in tax deductibles.

Home loans present numerous points of tax benefits and savings. The tax advisors would help getting the tax deductible on property taxes, which is among the most highly applicable cases of tax benefits. However, the fees paid for title searches and appraisals are not deductible under the tax laws. Although the tax benefits can be regularly earned on the home loans on mortgage, the capital reclaimed on cash paid during purchase of the former home is only on the year of buying. The homeowners would get the sum of money based on the value of the property paid at the time of purchase.

The government allows homeowners to obtain tax deductibles due to the interest paid on home loans. If the homeowners have already cleared – off the payment on first mortgage to acquire the home or landed property, they are eligible for secured home loans on the next loans taken on mortgage of the same landed property. In all such cases, the banks and financing agencies provide higher amount of loans at a lower rate of interest to homeowners.

But, it can be valid only under certain conditions. The most important factor that is judged to be qualified for such tax benefits is personal ownership of the residence or property. It either has to be the main home or a second landed property of the borrower. The homeowners are eligible for tax deduction on only one second home or landed property, in case of multiple landed properties. The documents regarding rights of authority over homeownership for buying and selling have to be presented while applying for home loan.

It becomes important to provide the tax lawyers with a record of in depth information on deductions. If a homeowners wishes to avail the tax benefits on home loans, the record of deductions included in the schedule must not be missed while submitting the tax payment forms. They must note the date on which the bank or agency issued the home loans. The government keeps amending the tax and home loans law. It becomes necessary to categorize and identify the segment under which the home loans fall to be entitled for tax deduction.

Tax policy discussions are meant to do what? Arrive at a rational policy, or garner votes. I think it is the latter. What is lost in all the debate over tax increases versus tax cuts, is science. Contrary to what most people may think, there is some scientific study of taxation.

<b>Applying The Laffer Curve To Tax Policy</b>

Invented by Arthur Laffer, the Laffer curve shows the relationship between tax rates and tax revenue collected. It demonstrates a simple principle that very few people understand, but one that is crucial to proper governance. It is the idea that as you raise taxes, you reach some point where actual revenues collected begin to drop.

This is perfectly logical, and you can understand it at the extremes. If the government took 95% of your income in taxes after the first $10,000, would you work much after that? Do they get any more taxes if you don’t work more? No. More money will actually be collected if they take a lower percentage, right?

Now add to this the fact that every dollar the government takes can’t be invested into new businesses or the expansion of existing businesses. New business investment means new income, and therefore more taxes. This isn’t hypothetical – you can’t invest what has been taken away from you. A friend of mine put off hiring employees and expanding his business for a long time because of a state business tax that would dramatically increase his taxes if he hired help.

That was a truly perverse tax policy, but any raising of taxes has to at some point cause a lowering of profits to the point where less is actually collected in taxes. There obviously has to be a point of diminishing returns. Where is it?

The science isn’t that exact yet, but the principle is clear. The top of the curve seems to be somewhere around 15% to 25% as a total tax burden (federal, state and local). What this means is that if tax rates go higher than that 15% to 25%, the curve goes down; the government actually collects less money.

This isn’t a republican or democratic issue. When Kennedy lowered tax rates and when Reagan did so (from a high of 70%!), tax revenues soared. The fact that under Reagan the government spent even faster than the rising revenues is another issue, but the lesson was clear: the Laffer Curve is an accurate description of tax rates and tax revenue.

In other words even if a political party or a society wants all sorts of social welfare programs, they have to realize that there is an ideal rate of taxation to get the most money to pay for these programs. Tax more heavily, and you get less, not more. This is the reality, whether people like it or not.

<b>The Politics Of Tax Policy</b>

Quite often, people don’t like this reality, and politics trumps science. For example, wealthy people are often taxed at rates that have them spending more time looking for loopholes than ways to make more taxable income. This lowers production, and so lowers the potential taxes collected. If your friends don’t get it when you explain this, point out that 20% of a million is more than 50% of three hundred thousand, so production matters – not just higher tax rates.

What happens if we recognize this? Will a politician explain that the government can collect more taxes from the wealthy if the rates are lowered? When they try, they lose votes. Long term there is real hope, because the principle is actually easy to understand. Short term it is politically difficult to say you want to lower taxes on the wealthy to a scientifically determined rate of greatest efficiency.

Many people want to believe that the rich can be taxed enough to pay for anything we want. The reality is that if most of the income of the wealthy was taken it would fund government for only a few weeks. There are more middle class than wealthy people, and more total income there, so that is where most taxes have to come from. Voter’s don’t know this or don’t like this, and politicians tell them what they want to hear. Hence the tax policy charade.