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Tax Trap #1: Waiting to Incorporate: What A Difference A Date Can Make
NOTE: This is the first in a series of 5 articles: "Small Business Tax Traps and How To Avoid Them"
If you're a sole proprietor, perhaps you've considered incorporating your small business or self-employment activity.
And so maybe you've been wondering, "When is the best time to incorporate?"
From a legal standpoint, any time is the best time. The sooner you incorporate, the sooner you make the move from the world of unlimited liability to the world of limited liability.
From a tax savings standpoint, any time is the best time. The sooner you incorporate, the sooner you will start putting more money in your own pocket and less in Uncle Sam's.
(For more about the potential tax savings of a corporation, see the second article in this series -- "Tax Trap #2: Double Taxation -- Isn't Once Enough?" http://www.YouSaveOnTaxes.com/tax-trap-2.html)
But from a **tax reporting** standpoint, there is one time of year that stands out as best: January 1st.
Why is that?
Assuming you have a sole proprietorship (or other entity, such as a partnership) that is up and running as of January 1, and assuming you then incorporate that existing entity on any date other than January 1, you face the possibility of filing not one but two business income tax returns for that year.
Here's an example to clarify this important point . . .
Let's say you've been operating your sole proprietorship for a few years, and in early 2005 you decide to incorporate. In January you get around to starting the paperwork, but life gets in the way and you finally get it done in late February. By the time your state processes the Articles of Incorporation, the start date of your new corporation is March 1.
For 2005, you must file a Schedule C for the period of January 1 through February 28, when your business was still a Sole
Proprietorship. And you must also file a corporate income tax return for March 1 through December 31.
Maybe that's no big deal. Maybe you enjoy filing one business income tax return so much, filing a second one doesn't bother you. And it may be that the inconvenience of filing two tax returns in 2005 is far outweighed by the legal and tax advantages of incorporating.
Keep in mind, too, that 2005 will be the only year you have to do this "double duty". In 2006 you will only have to file the corporate income tax return.
But if you are thinking about incorporating, the best time to do it, from a tax paperwork standpoint, is as of January 1. Only then do you have a "clean break" from the old sole proprietorship to the new corporation.
This timing issue can also be relevant if you decide to make the switch late in the year. If the effective date of the incorporation is November 15, you will have to file a Schedule C for January 1 through November 14, and a corporate return for November 15 through December 31. In that scenario, you should ask yourself, "Do the benefits of incorporating outweigh the convenience of waiting until January 1?"
So before you decide when to incorporate, take a moment to reflect on the tax reporting consequences of incorporating on January 1 vs. any other date.
Sometimes it may make sense to wait a few weeks (as in the second example), and sometimes it makes sense to "do it now", especially when January 1 is nearby.
About the Author
Wayne M. Davies is author of 3 tax-slashing eBooks for the self-employed, available separately or as a 3-volume set, "The Ultimate Small Business Tax Reduction Guide". http://www.YouSaveOnTaxes.com/ultimate-guide
To get your free copy of Wayne's 25-page report, "How To Instantly Double Your Deductions" visit: http://www.YouSaveOnTaxes.com
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The US government agency responsible for tax collection and tax law enforcement. Includes income tax forms, instructions, and agency publications. |
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Taxes: Tax Planning, Tools and Advice - MSN Money |
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Tax - Wikipedia, the free encyclopedia |
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Essential Links to Taxes |
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Taxes - Tax News for Home and Business from CNNMoney |
The latest in tax law updates, news, forms & advice from CNNMoney.com. Includes a refund savings calculator, and interactive tax lessons. |
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The Tax Foundation - Educating Taxpayers Since 1937 |
Devoted to educating taxpayers about tax policy and the total tax burden borne by Americans at all levels of government. |
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Welcome to the Vermont Department of Taxes |
Welcome to the Vermont Department of Taxes... ... Changes to Property Tax Adjustments in 2007 - updated 10/18. - Tax Expenditures Transition Report on ... |
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Franchise Tax Board Homepage |
The department that collects state personal income taxes and bank and corporation taxes for the State of California. Access to forms and tax information. |
www.ftb.ca.gov |
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HM Revenue & Customs: Home Page |
News and information on tax and national insurance, including downloadable leaflets and forms and the latest news on filing tax returns on-line. |
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State and Local Tax |
Piper Resources; State Tax Rates and Structure ...Federation of Tax Administrators; State Payroll Taxes Information ...Symmetry Software ... |
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Quicken.com |
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Tax news and advice from Bankrate.com |
Information on all phases of tax planning and preparation. |
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Online Tax Advice - Tax Preparation Help - Income Tax Tips |
Income Tax Tips - MarketWatch offers online tax advice and tips. ... IRS inflation adjustments mean tax break on next year's taxes. ... |
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