Tax Advantages of Incorporating a Private Practice

Incorporating a private practice can be advantageous.this with the company image by Yuriy Rozanov from Fotolia.com

A Private practice can be organized as a sole proprietorship, a partnership or it may be incorporated. Whether the practice is accounting, legal or medical, the advantages to being incorporated can allow perfectly legal shifting of the way some revenues and expenses are counted.

Income and Benefits

If a practice is organized as a sole proprietorship and earns $100,000, the owner of the sole proprietorship will be taxed at the 25 percent tax bracket on the entire $100,000. As a corporation, however, the main shareholder can choose to take $50,000 as a salary and leave the rest in as corporate profits. The tax bracket is then at 15 percent. Shareholders can choose to split a salary for themselves and leave the rest of the profits in the corporation, which increases the equity of the business and decreases individual tax liabilities.

A sole proprietorship wishing to provide retirement benefits to the owners must do so as an expense. As a corporation, however, the corporation can, as a separate legal entity, provide corporate retirement and medical plans with greater contribution limits than can be purchased by a sole proprietorship or partnership, and they can write off the cost of these plans from corporate revenues.

Since a corporation is a separate legal entity, it is possible for shareholders to lease personal assets to the corporation. Assets owned by shareholders that can be leased to a corporation can include buildings, vehicles or equipment. On a personal return, the shareholder claims the rental income and also claims the depreciation, repairs and maintenance, insurance and other costs that can negate the revenue, for tax purposes, from the rent received. The corporation, likewise, would deduct the costs of the rents paid.

An arrangement like this one is perfectly legal but there are specific requirements that must be met for this arrangement to be acceptable to the IRS. First, the rents received must be of a fair market value. In other words, the shareholder cannot charge the corporation substantially more or less than similar properties in the same area. A comparison of the similar properties, either from lists of rental properties or a report from a leasing agent, will be sufficient to establish Fair Market Value. Second, there must be a formal and valid lease agreement structured and written in the same way that a leasing agreement would be drawn up with an unrelated party.

C-corporations essentially experience double taxation, because income is taxed at the corporate level and again as shareholder income. A private practice may choose to incorporate as an S-corporaton.With an S-corporation, the revenues or losses will flow through from the corporate return to the personal returns of the shareholders. This eliminates double taxation that occurs should the same financial information get entered as a C-corporation. The S-corporation shareholders are taxed based on the original percentage of the corporation they own. If a shareholder originally contributed 15 percent of the capital to start the practice, that shareholder is taxed on 15 percent of the profits that 'flow-through' to his personal return.