We hear the usual benefits of incorporating all the time. Gain limited liability. Secure your personal assets. Raise funds and attract investors. But what about the lesser known benefits of incorporating? Since tax season is here, we thought we’d explore two lesser known tax benefits of incorporating that may pique your interest and if you haven’t yet, persuade you to finally incorporate that business of yours.
Lesser risk of IRS audit
According to the 2010 IRS Data Book, the IRS audited 8 percent of individual business owners who made more than $100,000. This is compared to only 0.4 percent of S Corporations that the IRS audited. Unlike unincorporated businesses, S Corporations are formalized businesses so the IRS prefers that they use double-entry accounting. This system creates formal steps in ensuring their tax filings have no errors or red flags, lessening the chances of your business getting audited by the IRS.
This is just another great example of the advantages of incorporating. Since incorporating makes your business formal and legitimate, you’ll need to take the precautionary steps to stay compliant with the law (e.g., double-entry accounting). The rules surrounding running a business can feel overwhelming but in the end, these very same regulations are put in place to not only make sure everyone is following the law but that your business is protected, too. It’s a win-win for everyone.
Lower taxable income
Did you know that when you incorporate, you can carry your losses forward year after year for up to seven years in most states? That means, you have the potential to lower your taxable income the following year if you had a loss in the previous year. Let’s say that your company lost $10,000 last year but you end up making $80,000 this year. Since you carried your loss over to the new year, a portion of your loss can be applied to your income — lowering your overall taxable income.
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