IRS Audit Preparation Tips

Image attribution: US Internal Revenue Service, US-PDGov

In 2010, 1,581,393 IRS audits were performed by the U.S. Internal Revenue Service according to Syracuse University federal tracking data. Of these audits 78.3 percent were by correspondence and 21.7 percent involved in person contact with an IRS agent. Depending on whether or not the audit takes place via correspondence or in person influences how a taxpayer prepares for the IRS audit. In either case, there are several pro active ways to prepare for an IRS audit that can potentially save time, money and reduce tax related stress.

Awareness of audit probability

Being aware of what triggers an audit, and the chance of an audit occurring are a good way to ready oneself for an audit. For example, in a March, 2011 article in Forbes magazine, Tax Lawyer Robert W. Wood states of total 2010 IRS audits 30 percent claimed the Earned Income Credit meaning at least 30 percent of audits occur for the lower end of the income scale. Knowing this, taxpayers might choose to exercise more caution when claiming this particular tax credit. Furthermore, reviewing IRS publications such as the Fiscal Year 2012 Annual Audit Plan provides insight into the direction and focus of IRS audits.

Familiarize with audit process

Knowing how IRS audits work can help expedite the process and avoid unforeseen consequences. Lesson four of The IRS audit video series guide is helpful in audit preparation and provides information about what is required of taxpayers during an audit. For example, during an audit, a taxpayer may receive either an IRS Form 4564 or Form 886-A detailing what specific documents the IRS requires from the tax payer. Additional videos in this series provide a comprehensive overview of the audit process as well as audit tips. IRS Publication 556 provides further information about taxpayer privileges such as mediation during an audit dispute.

Understand the IRS Audit Information Management System

The IRS keeps track of its audit activities via what is identified as the Audit Information Management System (AIMS). This system records the total number of audits, and IRS agent hours spent on audits in addition to audit results according to Syracuse University's Transactional Records Access Clearinghouse (TRAC). Understanding how the AIMS  system works and the audit process can be helpful in gaining insight about how to best handle an audit.

Review IRS audit statistics

The IRS publishes its audit information and this can be directly reviewed by taxpayers to get a sense of what the IRS examines in an audit and how they do it. To illustrate, the 2010 IRS Data Book claims that of the total 1,735,083 individual tax filing 'examinations' that took place in 2010, 92 percent of international tax filings required changes. This indicates international tax filers have a high probability of having their tax filing changed by the IRS if they are audited pointing to a higher level of scrutiny, error or both with these types of audit.

Know taxpayer audit rights

If the IRS selects a specific tax filer for audit, it is important to be aware of the rights granted before proceeding with the audit. For example, according to IRS audit information, taxpayers may record an audit interview or relocate the location of an audit upon prior notice and are also afforded the right to representation. Taxpayers may also appeal audits if they disagree with the changes requested by the IRS.

Tax Reform's Affects on America

Image attribution: OECD: Sugar-baby-love/Wikimedia Commons. CC0 1.0

As complex as tax reform is the bottom line never changes. Americans, the U.S. economy, global competitiveness, the budget deficit, tax gaps etc. are all affected by how well tax reform takes place. It is likely some type of tax reform will take place, who it will benefit remains to be seen.

Complete article link: http://www.helium.com/items/2290284-pros-and-cons-of-tax-reform

Tax Aspects of 'C' Corporations

In the United States, a C Corporation is a company that is incorporated and registered within a U.S. state and therefore subject to the tax code of the Federal Government and the specific State of registration. Since taxation requirements vary between C corporations and S Corporations, Limited Liability Corporations registered as S corporations, and sole proprietorships, there are several differences in how each type of company is taxed and what benefits taxation presents with each type of company.

Tax reporting requirements

A C corporation is required to file a form 1120 with the U.S. Internal Revenue Service every tax year. This tax form includes schedules A,C,E and J, K, L and M. C Corporations are subject to more tax reporting requirements than are S corporations and smaller businesses. IRS tax forms can be obtained through the Internal Revenue Website.

Tax benefits of C corporations

C corporations are subject to a sliding scale of taxation meaning the higher the income reported by the company, the greater the taxation. A C corporation may donate funds to a charitable cause to lower its tax bracket thereby saving more money that it would have lost without the charity contribution deduction.

If a C corporation is incorporated in Delaware, no State income tax is required from the corporation provided that it does not manage its business within the state. If the corporation is large enough, the no income tax policy can offset the higher franchise fees associated with incorporation in that State.

Owners of C corporations are also subject to being taxed twice due to the Corporations status as an independent tax entity. That is to say, corporate income is taxed and so are the profits paid out to shareholders in the form of dividends i.e. Owners must report those dividends on their individual form 1040's.

C Corporations like all U.S. corporations are taxed. The questions business owners or potential business owners might want to ask is how much is the tax rate, what kind of deductions are available and how can the taxes be minimized for such a company.

There are always ways to reduce taxes with knowledge of the tax system. While corporations may able to find these tax methods for themselves, tax attorneys and tax accountants may be worth the cost especially in the case of large capitalization C corporations. Three such tax related tips for C corporations are as follows:

C Corporation tax tips

• C Corporations may be better suited to own foreign subsidiaries under different tax jurisdictions than smaller companies.

• Nevada has no franchise fee or income tax for C corporations registered in its State. This can represent a big advantage in retaining earnings.

• Research business needs, requirements and plans to see which operations can yield the best tax results for a particular type of business. For example, if the company can safely operate out of Puerto Rico it may benefit from lower taxation rates overall in addition to deductions not necessarily available in the States.

• Incorporation as a 501c exempts a corporation from Federal income tax however this requires the corporation to meet certain operating guidelines. Companies operated as, religious organizations, not for profit status and or other exempt organizations may qualify as 501C(2) and 501C(3) status, each with unique tax benefits.

If a C corporation hasn't been formed yet, consider carefully which type of C corporation is right for the business and/or whether another type of corporation might be more suitable. Different types of businesses have different tax advantages, all of which may best be considered before incorporation and possibly after should the status of a company change.

How to File a Business Tax Extension With The IRS

In 2006, the United States Internal Revenue Service amended its policy to simplify the extension filing procedures for businesses seeking to file after the formal tax filing deadline for annual tax forms (irs.gov). The extension allows businesses to postpone formal filing for up to 6 months from the last possible filing date for businesses.

To qualify for an extension of filing, all a business need do is complete an IRS form 7004. IRS form 7004 is not the only type of extension form, as tax payments deferral requires additional documentation, such as via IRS form 1138. Furthermore, in regard to employee retirement plan reporting, a separate IRS form 5558 is required for extension up to 2.5 months.

• Form 7004: Extension for filing tax documentation with the IRS 

• Form 1138: Extension for business payment of taxes 

• Form 5558: Extension for filing employee plan distributions

Filed IRS Forms 7004 grant either 5 month or 6 month filing extensions, depending on the type of business. Partnerships, Estates and Trusts may only qualify for the 5 month extension, while a host of other business types may qualify for the 6 month extension. When filing for an extension, the only completed form that needs to be sent to the Internal Revenue Service is the form 7004. According to the IRS, taxes due from a business, and/or interest on tax due is still incurred, whether it be retroactively or otherwise, regardless of the tax filing extension. As stated above, the payment of said taxes may be deferred by using IRS form 1138.

Steps for filing an extension with the IRS

To illustrate how a business would go about filing for an extension with the IRS, the following steps may be helpful. Since tax filing involves a lot of financial records, obtaining quarterly reports, financial statements, and tax deductions such as contributions to retirement plans and other tax deductible items, an extension may be required to properly gather, record and submit tax documentation. On IRS form 7004, no reason is needed for filing the extension. The services of an accountant, tax specialist or tax attorney may be beneficial in some situations.

Step 1: Gather relevant tax documents, ex-financial statements, withholdings, and retirement plan contributions

Step 2: Place all pertinent documentation and forms into a folder and/or computer file for later use

Step 3: Identify business structure: ex-sole proprietorship, C-Corporation, LLC etc.

Step 4: Acquire and complete IRS form 7004, then mail to appropriate IRS tax service center.

Step 5: Calculate probable tax due and/or potential interest payments on the deferred tax filing.

Step 6: Submit form 7004 and/or any other necessary tax filing extension forms. Send payments and any relevant payment deferral forms to the IRS.

Since companies often have different tax situations, bookkeeping systems and other financial recordkeeping, it is important to identify what can be deducted from company income to ensure the business doesn't overpay taxes. Doing so may take time, hence the need for the extension. Tax filing extensions may be needed for a number of purposes.

Summary

Filing for a business tax filing extension with the United States Internal Revenue Service is fairly simple in comparison to the actual filing of annual tax documents. Essentially, all that is needed is a form 7004, however, depending on the businesses situation, other forms may also be needed such as forms 1138 and 5558. When in doubt, contacting the U.S. Internal Revenue Service businesses or corporate division may be helpful. 

IRS tax centers are located throughout the country and can be located through the linked map. Additional assistance from tax specialists, tax accountants and/or attorneys may be necessary in some situations. Keeping paperwork, financial records and bookkeeping systems organized can be helpful in the time following an extension as ultimately, tax filing should be accurately reported. This article has illustrated ways businesses can file for tax filing extension with the U.S. Internal Revenue Service by pointing out paperwork requirements, in addition to steps that may be involved when filing for extension.

Sources:

1. http://www.irs.gov/newsroom/article/0,id=154554,00.html
2. http://www.irs.gov/pub/irs-pdf/f1138.pdf http://www.irs.gov/pub/irs-pdf/f5558.pdf
3. http://www.irs.gov/pub/irs-pdf/f7004.pdf
4. http://www.irs.gov/pub/irs-pdf/i7004.pdf
5. http://www.irs.gov/formspubs/article/0,id=98155,00.html

Tax Aspects of Partnerships

A business partnership is a form of business in which more than one owner have financial stakes in the outcome of that business. Taxation of business partnerships in the United States are regulated by U.S. Internal Revenue Code title 26 sections 701-709 in addition to other sections of that title.

Depending on the type of business the partnership involves, the collaboration may take a form of a partnership, limited partnership or limited liability partnership. In the case of an LLC Partnership, the business is subject to the similar taxation requirements as a non-partnership LLC with more than one owner. Additionally, LLC partners are exempt from personal liability should the business and/or one of the partner's financial support of the company become insolvent.

Tax benefits of partnerships

Partnerships have some attractive tax deductions in calculating net income and loss. These deductions include rent, bad debt, repairs, interest expenses, taxes and licenses and employee expenses. These deductions can make investment in a partnership a reasonable venture because they account for a considerable amount of operation costs.

In the case of a Limited partnership, partners may be able to bypass income tax in the instance of non-receipt of funds from the business' income. In other words income paid by the partnership is subject to income tax only after receipt. This may not only benefit the performance of the business, but the tax advantages to the individual owners/partners especially if they have sources of income outside the partnership.

Income generated through a partnership is reported on each partner's individual tax filing documents after it has been distributed. Thus the profit attributable to the partnership is reported but not taxed thereby avoids being taxed twice.

An additional tax benefit of partnerships is that the tax filing requirements are not as extensive as formal corporations with over 100 shareholders. This can present a relief to the partners and tax payers in terms of paperwork and time spent performing administrative duties.

Disadvantages

A tax disadvantage of partnerships is the income generated from the business is generally taxable at the individual level regardless of whether or not it is never withdrawn from the business. In other words, if the partners decide to forego receipt of the partnership income and instead use it to further promote business activities, that income is still taxable as the partner's individual share of the income.

Tax forms

The United States Internal Revenue Service (IRS) requires a Form 1065 'U.S. Return of Partnership Income' be filed with the IRS each tax year. This is merely a tax reporting requirement and not a document that's purpose is taxation of the business. A schedule K is also attached to the form 1065. This schedule K makes evident how the income is distributed among the business owners.

In addition to the Form 1065, the partners are required to file a form 1040 or 1040 ES depending on the financial circumstances of the company at the time of reporting information to the IRS.

Partnerships that are also Limited Liability Corporations are subject to different income reporting procedures involving the use of different IRS forms. These forms include schedule C's or F's as the income generated through such a corporation is considered a capital gain.

Additional forms needed may include the following:

Form 4562: If property used in operations is owned and has depreciated in value.
Form 940 & 941: For partnerships that paid taxes on employees income
Form W-2's: If the partners are also employees.
Form W-4's: To calculate tax withholdings

Tax tips on partnerships

Partnerships may be the right type of business from a tax perspective if certain requirements are met. When considering a new partnership or taxation questions of an existing partnership one may also want to take the following recommendations into account.

• Consult a business attorney or tax accountant in the event of complex or confusing taxation situations.

• If not invested in the company, elect to be a limited partner to safeguard one's investment of time and energy

• If planning a non LLC partnership venture, asses the credit worthiness and reliability of the partners as all the partners become personally liable for business debt and taxes in this type of partnership.

• Contact the U.S. Internal Revenue Service for answers regarding tax forms and filing requirements.

To recap, business partnerships can be beneficial in terms of taxation if all the partners are responsible for their portions of company debt and operations. Limited liability partnerships may be utilized to protect owners from personal liability if the company meets certain eligibility requirements for LLC and/or limited status. Partnerships are afforded less tax reporting requirements than larger, more formal corporations and also benefit from avoidance of 'double taxation' and considerable tax deductions.

Business Owner's Guide to C Corporation Tax Rates

C corporations, which are the largest of U.S. businesses, can be taxed in several different ways. Specifically, different tax rates are applied to capital gains on the sale of shares of C corporations and dividends. Additionally, federal and state taxes may be charged on earnings held by the corporation. These tax rates are not standard across the board in regard to state tax and there are ways C corporations can minimize and lower tax rates.

Federal taxation of C corporations

The taxation of income generated by C corporations is taxed on a sliding scale at the federal level. The tax rates according to the United States Internal Revenue Service are as described below. Generally, the tax rate rises with income but at certain saturation points the tax rate is highest and then drops a few percentage points before rising and then dropping again.

The lowest tax rate being 0% or negative amounts and the highest tax rate being 38% for profit between $15,000,000-$18,333,333. The tax rates adjust to 15% for income between $0-$50,000.00 then move up to 25% for taxable income between $50,000-75,000 and up again to 34% for taxable income between $75, 000-$100,000, and then up to 39% for profit between $100,000 and $335,000. An interesting drop occurs in the tax rate for incomes above $335,000-$15,000,000 at which the rate is either 34% if below 10 million and 35% if below fifteen million. Taxable income over $18,333,333 drops back to 35%

If a C-corporation operates offshore on the Island of Puerto Rico and U.S. territory, the maximum corporate tax is currently 7% and lower for corporations in certain industries subject to tax exemption. Additionally, there are several favorable tax credits and deductions that can be compute a lower adjusted gross income and taxable income. Deductions can includes up to 200% or double deduction for training expenses, and research and development. Additionally corporate activities that make use of local goods, workers and re institute struggling businesses may also receive credit to further lower taxable income and total taxation.

State taxation of C Corporations

Unlike Federal taxation, state taxation can be avoided altogether depending on the State of operation. States such as Delaware and Nevada have favorable state tax rates but annual franchise fees in the State of Delaware may offset the tax savings. State corporate tax rates range from 0%-10%, and thus have significant influence on a companies total income potential. Some of the more expensive states to operate a C Corporation in, in terms of State taxation are Massachusetts 9.5%, Minnesota 9.8% and Pennsylvania 9.9% and some of the lower taxed States include Kansas 4%, Colorado 4.5% and Utah 5%.

Investor tax rates on capital gains from C corporations

Owners of C Corporations are only subject to capital gains tax if the shares of the company are sold within the fiscal tax year ending December 31 of any given year. Many advocates of lower corporate taxation proclaim the capital gains tax to be a double taxation because as owners of the company, the shareholders have already been subject to one tax through the corporate income tax. Nevertheless, capital gains tax continues to exist and comes in two types, short term and long term capital gains tax.

Short term capital gains tax is higher and applies to profit on the sale of businesses owned for less than one year. The short term capital gains tax is the same as one's normal income tax rate. For example, if an individual has a taxable income of $31,000, is filing single and the tax rate is 15% , then that individual will be taxed 15% on short term capital gains. This rate rises with income making short term capital gains on par with long term capital gains only while incomes remain in the 15% bracket. That is to say, long term capital gains tax rates are fixed at 15% whereas short term are variable and can range from 10-35% depending on income levels.

Tax rate on C Corporation dividends

Federal taxation of dividends is currently set at a maximum of 15% and a minimum of 5% for individuals at or below the 15% income tax bracket. This tax rate is a result of Jobs and Growth Tax Relief Reconciliation Act of 2003. For this reasons, dividends with fixed payouts may be advantageous to certain corporate officers and investors instead of stock options because the difference in taxation could cost more than the extra yield between the two investments and those yields influence on overall income.

Strategies for C Corporations to lower tax rates

There are several methods by which C Corporations can lower taxation. These strategies may include geographical location, restricted and/or heavy insider ownership of the corporation, roll over of negative earnings from previous years, and legal manipulation of earnings so as to place the corporations taxable income in a lower tax bracket. For example, if a C corporation's taxable income is near the border of the 25% and 34% tax rates, that company may make a charitable contribution just large enough to lower taxable income to the 25% bracket thereby saving 9% in taxes. That 9% savings can far outweigh the cost of the charitable contribution in some cases.

Taxation of C Corporations is subject to various tax rates and regulations depending on what kind if income is being taxed, i.e. C Corporation earnings, capital gains from the sale of C corporations, dividend income etc. Additionally, tax rates vary based on geographical location and state of incorporation and operation. Financially strategic use of deductions and tax credits can also have significant bearing on the total taxable income a C Corporation incurs for a given tax year.

Sources:

1. http://www.nysscpa.org/cpajournal/2004/1004/essentials/p40.htm
2. http://www.irs.gov
3. http://www.pridco.gobierno.pr/english/tax_and_business_incentives/tax_incentives/3.12corp_tax_incentives.htl
4. http://www.taxadmin.org/fta/rate/corp_inc.html

How a C Corporation is taxed

C corporations are the largest of U.S. corporations and also subject to the most extensive tax reporting requirements and documentation. C corporations may include a private company with 200 shareholders or a large publicly traded company with market capitalization in the billions of dollars. C corporations are subject to reporting a lot of financial activities and thus require strong bookkeeping and documentation throughout the tax year.

Tax forms required

There is a considerable amount of required documentation for filing as a C corporations. The primary IRS form is the 1120 which is different from the 1120S, a tax form required for S-Corporations which are small businesses with 100 or less shareholders. The form 1120 also includes several schedules that are used for calculating cost of goods sold, tax credit, total officer compensation, balance sheet items and dividends. The necessary documents to fill out and their complete instructions are freely available through the Internal Revenue Service.

How tax is calculated for C corporations

A primary factor in the calculation of how much a corporation will be taxed is retained income. The higher the retained income, the higher the tax imposed on the corporation will be. Since retained income is the bottom line after expenses and costs have been deducted this number can end up being quite a bit lower than revenue from sales and sometimes even negative in which case no tax is applied.

The idea that a C corporation is subject to double taxation is theoretically true but in cases where the shareholders do not sell their shares of the company they are not taxed capital gains tax. In other words, capital gains taxes are only charged following sales of shares and dividends are both deductible from taxation before earnings and taxed a lower rate than capital gains to shareholders.

C corporation tax lowering strategies

There are several ways to lower the tax of a C corporation. Specifically, since state taxation is also a factor, choosing to headquarter and/or operate a C corporation out of state with favorable business laws can be advantageous. For example, operating out of Nevada can be beneficial for a C Corporation because there are no state taxes or franchise fees imposed on the businesses. For C corporations that don't mind operating out of the U.S. mainland, the territory of Puerto Rico also offers significant tax advantages.

Additional strategies include the paying out of dividends or redirecting profits into a dividend reinvestment program (DRIP), profit sharing plans and./or pensions, both of which are tax deferred to participants and tax deductible to the corporation. Other options can include forming a different corporation altogether, for example a non-profit corporation or a MREIT in the case of real estate investment companies. The latter of these pays no taxes because the profits are either reinvested into the company or distributed among shareholders in the form of deductible dividends.

Another interest tax fact about C corporations is that in tax years where the company experiences a net loss, not only does the company not pay taxes, but the loss can be carried over to the following year and deducted from the total earnings of that year or any other year up to 5 years after the year of the loss. This is an incentive to assist struggling C corporations or C corporations in financial readjustment regain profitability without tax burden.

Summary

C corporations are one of several types of businesses identified within the United States tax code. C corporations are the largest type of corporation and subject to the highest amount of tax reporting requirements. However, C corporations are also able to deduct significantly more from revenue numbers than smaller corporations and the double taxation often associated with C corporations can be avoided with drips, long term holding of shares, and various other tax strategies including but not limited to net loss carry over from previous years, state or territory of operation and profit sharing plans.

Sources:

1. http://www.irs.gov
2. http://www.expertlaw.com/library/business/c_corporation.html

Tax Aspects of LLCs

A Limited Liability Corporation (LLC) is a company formed under legal protection from personal liability of the owner(s)/member(s). This means if the company should fall into financial difficulty the debts of the company cannot be paid from the owner's personal assets.

Limited Liability Corporations generally have lower tax filing requirements, and Government associated regulation that would be the case with larger more complex corporations.

Taxation of Limited Liability Corporations is accorded its own specific rules and regulations, some of which are made available through the Internal Revenue Service. Income or losses from LLC's are either taxed on form 1040's as individual income if only one owner/member exists, and on a form 1065 as capital gains or losses if more than one member owns the company.

Furthermore, in the case of a LLC with multiple members, the tax benefits are the same but the tax paperwork requirements are different. The taxation of short term capital gains is subject to the same tax bracket as an individuals regular income bracket i.e. gains incurred within a time period of under a year fall into the tax filers adjusted gross income tax range.

The IRS tax forms needed for Limited Liability Corporations include any one of the following depending on the type of LLC, and are available through the Inernal Revenue Website www.irs.gov and/or through contact with the I.R.S.

• Forms1120, or 1120S, and sometimes 8832 if filing as a corporation.

• 1065 if filing as one of a group of members/owners

• Schedule C , E or F if an individual owner of a LLC

• W-2's (Employees)

Tax advantages of LLC's:

If a Limited Liability Corporation has only one member, the member remains legally free from the company's liability, and may file a company's income and expenses associated with his or her personal tax disclosures.

The benefit this allows is single taxation of earnings rather than double taxation through both the owner of the LLC and the LLC itself. Additionally, income earned through the LLC can be withdrawn as a dividend or profit distribution without concern of taxation through the LLC.

When filing as a partnership, LLC's can deduct bad debt, property depreciation, tax, salaries, interest expenses and employee benefit programs on IRS form 1065.

LLC's may be subject to tax exemptions

If a Limited Liability Corporation qualifies for tax exemptions, the benefits of these exemptions is passed on to the owners through a higher income that is only taxed once. For example, a LLC may be exempt from property tax in various jurisdictions making the net profit of that LLC higher due to lower operating costs. This profit is then passed on to owners.

Other tax deductions include losses incurred through the LLC. Thus even though the owner's personal assets are not at stake, the benefits of a failing or company experiencing losses can still be maximized upon as capital loss deduction on IRS Form1040.

TIPS on LLC taxation

• LLC's may be suitable for small startup companies or companies that do not require a large amount of capitalization to operate.

• Forming an LLC may be right for you and/or your business partners if you want to protect your 

personal assets and avoid double taxation.

• As a business owner, or as a partnership LLC, administrating tax reporting requirements may be more simple and easy to operate as an LLC.

• If switching an existing company into an LLC be aware that the valuation the LLC may be considered higher by the IRS, thus incurring a potentially unwanted capital gain.

• Tax accountants and lawyers may also be of assistance when forming and LLC or preparing LLC tax documents.

There are many advantages to Limited Liability Corporations including convenience, simpler taxation, avoidance of double taxation and of course limited liability. Considering formation as a LLC may involve state regulations that vary across one's nation. 

That is to say, incorporation requirements may vary from state to state thus presenting particular advantages and/or disadvantages to incorporation in one state over another. It may be advisable to consider these incorporation guidelines prior to incorporation as an LLC in regards to potential forms of lower taxation, ease of operations, administrative regulations and operating limitations.

How a C Corporation is taxed

C corporations are the largest of U.S. corporations and also subject to the most extensive tax reporting requirements and documentation. C corporations may include a private company with 200 shareholders or a large publicly traded company with market capitalization in the billions of dollars. C corporations are subject to reporting a lot of financial activities and thus require strong bookkeeping and documentation throughout the tax year.

Tax forms required

There is a considerable amount of required documentation for filing as a C corporations. The primary IRS form is the 1120 which is different from the 1120S, a tax form required for S-Corporations which are small businesses with 100 or less shareholders. The form 1120 also includes several schedules that are used for calculating cost of goods sold, tax credit, total officer compensation, balance sheet items and dividends. The necessary documents to fill out and their complete instructions are freely available through the Internal Revenue Service.

How tax is calculated for C corporations

A primary factor in the calculation of how much a corporation will be taxed is retained income. The higher the retained income, the higher the tax imposed on the corporation will be. Since retained income is the bottom line after expenses and costs have been deducted this number can end up being quite a bit lower than revenue from sales and sometimes even negative in which case no tax is applied.

The idea that a C corporation is subject to double taxation is theoretically true but in cases where the shareholders do not sell their shares of the company they are not taxed capital gains tax. In other words, capital gains taxes are only charged following sales of shares and dividends are both deductible from taxation before earnings and taxed a lower rate than capital gains to shareholders.

C corporation tax lowering strategies

There are several ways to lower the tax of a C corporation. Specifically, since state taxation is also a factor, choosing to headquarter and/or operate a C corporation out of state with favorable business laws can be advantageous. For example, operating out of Nevada can be beneficial for a C Corporation because there are no state taxes or franchise fees imposed on the businesses. For C corporations that don't mind operating out of the U.S. mainland, the territory of Puerto Rico also offers significant tax advantages.

Additional strategies include the paying out of dividends or redirecting profits into a dividend reinvestment program (DRIP), profit sharing plans and./or pensions, both of which are tax deferred to participants and tax deductible to the corporation. Other options can include forming a different corporation altogether, for example a non-profit corporation or a MREIT in the case of real estate investment companies. The latter of these pays no taxes because the profits are either reinvested into the company or distributed among shareholders in the form of deductible dividends.

Another interest tax fact about C corporations is that in tax years where the company experiences a net loss, not only does the company not pay taxes, but the loss can be carried over to the following year and deducted from the total earnings of that year or any other year up to 5 years after the year of the loss. This is an incentive to assist struggling C corporations or C corporations in financial readjustment regain profitability without tax burden.

Summary

C corporations are one of several types of businesses identified within the United States tax code. C corporations are the largest type of corporation and subject to the highest amount of tax reporting requirements. However, C corporations are also able to deduct significantly more from revenue numbers than smaller corporations and the double taxation often associated with C corporations can be avoided with drips, long term holding of shares, and various other tax strategies including but not limited to net loss carry over from previous years, state or territory of operation and profit sharing plans.

Sources:

1. http://www.irs.gov
2. http://www.expertlaw.com/library/business/c_corporation.html

Taxes on Inherited Roth IRAs

Taxes on Roth Individual Retirement Accounts (IRA's) can be minimized and/or avoided if certain tax rules are heeded with financial caution and prudence. This article will discuss the taxation of inherited Roth IRA's, and some of the scenarios in which Roth IRA's might be taxed after inheritance. Roth IRA's are a retirement savings instrument that might be best considered as part of an overall retirement plan so as to 1) maintain federal insurance of retirement funds 2) minimize taxation during life and after life in the case of inherited Roth IRA's and 3) in the diversification of assets for purposes of risk management.

Taxes on Inherited Roth IRAs

When faced with inheritance, the beneficiaries may be exposed to three to four types of taxes, specifically, estate tax, federal and state income tax and possibly property tax on inherited property. Estate tax determines how much of the deceased's income will be taxed before distribution, then federal income tax follows, with state income tax after that. For example, if estate tax charges 48% of the estate's value, the taxable income from the estate is the value after estate tax is deducted. 

In some cases, estate and income tax combined can end up costing a beneficiary near half of the inheritance. In the case of Roth IRA's, the insured amount is only $250,000 for a single Roth IRA, so it might be imprudent to have a Roth with a value above this amount. If however, the value of the Roth IRA is higher than this amount, the following hypothetical example illustrates how it might be taxed with close to maximum estate tax rates.

1) Roth IRA value $5 million (subject to estate tax for amount of $3.5 million in 2009) 2) Tax equals $555,800 + 45%=$555,800 3) $555,800+ 45% x ($944,200)=$555,800+$444,890=$980,690 4) $3.5Million -$980,690=$2,519,310

How to minimize or avoid estate tax on Roth IRAs

To avoid the estate tax on inherited Roth IRA's the deceased can do a number of things prior to dying, as can the beneficiaries of the deceased. First, if the Roth IRA is included in an estate valued under the taxable inheritance minimum, estate tax may not be charged on the Roth IRA's value. Second, the Roth IRA can be part of an AB trust in which ownership of the trust is not assumed by the beneficiaries at the time of death. Other options include better tax planning several years prior to dying so that asset growth is less likely to be subject to high taxes.

• Place the Roth IRA in an AB trust before dying
• Ensure the value of the estate is below the minimum taxable amount
• Reallocate Roth funds into non-taxable instrument prior to death
• Transfer ownership of the Roth IRA to a foreign owned Trust company

Summary

Roth IRA's are useful financial instruments for avoiding income tax but not estate tax. (investmentguide.com) Thus, if an estate is worth over the taxable benchmark set by the government for that year, for example $3 million, then that value is taxed if it includes a Roth IRA. For this reason it can be important to know which assets and financial instruments are not included in the estate value calculation.

Moreover, being aware of what methods exist for lowering potential tax on inherited Roth IRA's can also be important. For example, in some instances, trusts such as AB trusts are not taxable following the death of the primary trustee. It may be unlikely that a Roth IRA would be subject to estate tax regardless of their ability to avoid this tax because Roth IRA's are only insured up to $250, 000.00. For this reason, controlling the size of the Roth IRA and hedging against taxes through tax protected investment vehicles such as insurance policies or non-taxable bonds may be a good idea.

Sources:

1. http://www.irs.gov/pub/irs-pdf/p590.pdf
2. http://tinyurl.com/64rgbz2
3. http://fsc.fsonline.com/fsj/archive/2004est.html
4. http://rothiraexplained.com/fdic-insurance-coverage-for-iras.html
5. http://www.schwab.com/public/file?cmsid=P-1625576&cv1
6. http://tinyurl.com/6d4qsw7 (Expired reference link)