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               About 80% of America's small businesses are
          unincorporated, according to government statistics. 
          Many of these businesses could reduce their income tax
          bills by incorporating, because the corporation is
          still America's best small-business tax shelter.
               Let's look at a small retail business that is
          jointly owned by a husband and wife, Max and Rosie
          Profits.  The business has gross sales of over $415,000
          and a net income of about $48,800.  The Profits also
          earn about $4,000 in interest and $1,200 in dividends.
               Out of this, they have to pay self-employment tax
          of about $6,900.  They also pay medical expenses of
          almost $10,000.  Because they can deduct only medical
          expenses that exceed 7.5% of their adjusted gross
          income, $6,300 of their medical outlay is included in
          their itemized deductions.  Their federal income taxes
          are about $3,800.
               Now suppose the Profits incorporate the business. 
          The first thing the corporation lets them do is
          establish a medical-expense reimbursement plan under
          which the corporation pays their medical expenses.  The
          payments are tax-free to the Profits and deductible by
          the corporation.
               Other expenditures, such as automobile purchases,
          could also be paid for by the corporation.  The value
          of the vehicles would have to be included in the
          Profits' gross income, but the expenses would be
          deductible by the corporation -- and it is cheaper to
          include them in gross income than to pay for them with
          after-tax income.
               The Profits draw salaries from the corporation,
          but they will not need to draw the $48,800 they are
          netting as proprietors, because the medical and other
          expenses are paid by the corporation.  By taking
          salaries totaling about $35,000, they eliminate $2,110
          in Social Security self-employment taxes.  The standard
          deduction and personal exemptions cut their taxable
          income to $22,850.  Their federal income taxes for the
          year are $3,428.  Total tax savings from incorporating
          so far are about $2,500.
               Eventually, the Profits can have the corporation
          set up a pension fund and other benefit programs for
          them.  They can also get more tax-advantaged cash out
          of the corporation by buying business assets themselves
          and leasing them to the corporation.  The corporation's
          taxable income up to $50,000 is taxed at its 15% rate,
          but most small corporations can keep the taxable income
          around zero.
               Some disadvantages of forming a corporation are
          that another set of tax returns must be filed and that
          business licenses must be obtained.  To maximize tax-
          reduction possibilities, the Profits might need a
          lawyer or accountant to set up the benefit plans.  They
          must be sure to keep the corporation's money and
          records separate from their own.  Also, some, though
          not all, of the corporation's tax breaks will apply
          only to personal service corporations, such as those
          established by doctors, lawyers, accountants,
          consultants, etc.  Thus, not everyone can get all the
          tax benefits of incorporating.
               But the savings will compound year after year and
          grow as the business grows.  Another advantage is that
          when cash is tight the Profits might be able to borrow
          from their retirement plans.  Unincorporated business
          owners cannot do this; loans from Keogh plans by
          business owners are treated as distributions and are
          subject to taxes.
               Eventually, when the taxable income of the
          corporation is in the $150,000 to $200,000 range, the
          Profits will want to consider converting to an S
          corporation.
               For information on a highly-recommended national
          service that can form a corporation for you in any
          state, write to Incorporation Information Package, 818
          Washington Street, Wilmington DE 19801.
          
          
          
