How to Reduce Corporate Taxes

Techniques exist to reduce corporate taxes.

Individuals have the option of forming either a C-Corporation or an S-Corporation when starting a business. The tax treatment for each type of corporation is different. C-Corporations are subject to both federal and state income taxes. C-Corporations remit the appropriate income tax with their federal and state income tax returns. S-Corporations are not responsible for remitting income tax on the profit earned. Instead, each shareholder of the S-Corporation receives Form K-1 which indicates his portion of the S-Corporation profit. The shareholders then report this income on their personal tax returns, income taxes are calculated at the personal level and the shareholders are individually responsible for paying the taxes on their share of the S-Corporation profit. S-Corporations are subject to annual fees imposed by the state they do business in.

Things You'll Need

• Corporation's income statement
• Corporation's balance sheet
• Corporation's general ledger

Instructions

1. Review the corporation's income statement for reasonableness. Prepare a comparison of each income and expense item from one year to the next to make inconsistencies more apparent. If an expense is not in line with prior years' expenses, it may be an indication that expenses need to be recorded for the year. This is called accruing expenses. An accrual is made for expenses that have not yet been paid but are due within the next 30 days.

2. Verify that all expenses that should have been paid during the current year were paid by December 31. For example, if real estate tax was paid on January 2, the expense may belong to the prior year. In that case, an adjustment should be made to accrue real estate taxes for the current year. This will decrease the corporation's net income and therefore the corporate tax.

3. Take a Section 179 expense deduction for fixed asset purchases in the year the purchase was made instead of depreciating the assets over their useful lives. Although the corporation will miss out on the depreciation expense in future years, the greater Section 179 expense deduction in the current year will help reduce the corporation's net income and therefore the corporate tax. Section 179 expense deductions are subject to limitations which change each year. For tax year 2009, up to $250,000 of tangible business property was able to be expensed under Section 179.

4. Take advantage of net operating loss carryforwards and carrybacks. A tax loss can be carried back two years or carried forward 20 years to offset corporate profit. If the corporation elects to carry back the net operating loss, an amended tax return will need to be prepared.

References

• Internal Revenue Service: Depreciation and Section 179 Expense
• Internal Revenue Service: Publication 542