A
properly structured corporation decreases tax liabilities and increases cash flow.
Several forms of corporate structures are available
to corporations; Schedule C Corporation, Sub Chapter S Corporation, and Limited
Liability Corporation.
James
R. Hines of the University of Michigan in Corporate Taxation, “corporate
tax obligations consist chiefly of fractions of corporate income.” Hines goes
on to state: “The taxation of corporate income encourages entrepreneurs and managers
to structure and conduct their business operations in ways designed to avoid taxes.”
Equity financing when replaced be debt financing has the effect of reducing potential
tax liabilities.
Hines
suggests that US corporate policy affects business decision making by “discouraging
the incorporation of profitable businesses that can be organized in noncorporate
form. In the United States, business organization whose income is not subject
to corporate income taxes include small (“S”) corporations, partnership, sole
proprietorships, and limited liability companies (p6).
Creation of the limited liability company offers corporate
shield protection and the opportunity to pass members income as regular income,
avoiding the double taxation associated with “C Corporations.”
Firms
seeking in reducing tax liabilities should evaluate current budgets for spending
patterns; leasing real estate offers monthly deductions fully deducible.
Investing
in real estate for leasing to other organizations offers substantial deductions.
Municipal mutual funds offers market rates with shielded income.
Hines points out “taxation influences the timing,
magnitude, and composition of corporate investment in plant and equipment, inventories,
research, and development, and other business assets.
Hines
continues on with a notation from Krzyzaniak and Musgrave that corporate taxation
increases the cost of corporate output and increases transfers to the nonprofit
sector through taxation. The article continues with “if the corporate sector
of the economy has a lower/capital ratio than the noncoporate sectors of the economy,
then the introduction of a corporate tax shifts resources into the noncoporate
sector and thereby raises the demand for capital.
This
discourse allows the corporate capital model to focus on tuning the corporate
budget to optimize deductions. Optimal deductions are those that indirectly
generate income in future periods, or defer income until future periods.
Leasing
plant and facilities is a deductible expense in the current period. This reduces
taxable income, but does not assist in building assets. An alternative to leasing
is the purchase of assets that appreciate such as office buildings and other real
estate.
Commercial
real estate offers deductions for interest and depreciation, shielding tax liabilities
for future periods.
A
C Corporation has double taxation, as when founders disinvest, in general it is
considered as regular income. A Limited Liability Company has the ability to
pass members investment or gains and accounted for as ordinary income on the IRS
1040 return.
A properly structured company can reduce tax liability,
and one structure allows maximum return on founder’s initial investment. Instead
of issuing stock certificates for the initial investment, it is prudent for the
founders to loan the new corporation capital at market rate.
This
structure allows the corporation to repay the loan to the founders with interest,
which is not regular income. With the proper structure, the founders can avoid
double taxation, increase capital realization, and reduce tax consequences.
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Auebach, Alan J 2001.
Taxation and corporate financial policy, Handbook of public economics, vol. 3.
North-Holland, Amsterdam.
Hall,
Robert E. and Dale W. Jorgenson. 1967. Tax policy and investment behavior.
American Economic Review 57: 391-414.
Hines,
James R. Jr, 1999. Lessons from behavioral responses to international taxation.
National Tax Journal 52: 305-322.
Hines,
James R. Jr, 2001. Corporate Taxation. University of Michigan.
