Nevada Tax Considerations

Income tax strategies to consider

Income tax strategies can be important tools in preserving your income. Consider the following ideas for federal and state income taxes. Always consult with an attorney or CPA before making choices about tax strategies.

Federal income tax

Income from all business entity types, except corporations is taxed at individual rates. For those corporations ( which qualify as "S" corporations, their income is also passed through to the shareholders and is taxed at individual rates.

But here's the important thing to know...Other entities can use these tax accounting rules, too. So, for income tax purposes, an LLC is the most flexible type of entity for tax purposes. An LLC can be anything the owner wants it to be. For example, an LLC with one owner (single member LLC) can be a a "disregarded entity". And an LLC with multiple owners can be a partnership an S corporation.

The owners of a limited liability company, or LLC, can select the tax treatment they want for their business.

The best resource for making this selection is an attorney who specializes in transactional law or a CPA who specializes in entity tax preparation.

You can pick the tax treatment that saves you the most taxes

An S corporation, for example, may save a small business thousands of dollars a year in self-employment taxes. And a C corporation, as another example, can allow small business owners to pay tax-free fringe benefits to themselves which cam save money in income taxes. As always, consult with your attorney and tax specialist when deciding the best course of action.

The owners of a profitable small corporation or LLC can often save thousands of dollars in overall income taxes by keeping a modest amount of profits in the corporation or LLC and paying out the rest to themselves as employee salaries and bonuses. Called "income splitting," this works because corporate tax rates on the first $75,000 of corporate income are typically lower than the owners' personal income tax rates. These kinds of decisions are very important so get some professional help so you don't make any critical errors.l

How income splitting works

As you already know, a corporation is a separate legal entity from its owners, and it pays its own income taxes. This means that if the owners keep some income in the corporation (profits that are not paid out to the owners in the form of salaries and bonuses), it will be taxed at corporate income tax rates, not at the individual income tax rates of its owners. Income that is kept in the corporation or LLC (taxed as a corporation) is shown as "retained earnings" and it is reported on IRS Form 1120 each year.

Federal corporate income tax rates on the first $75,000 of corporate income are often lower than the federal individual income tax rates on that same amount of personal income--particularly if the person has additional income from other sources. This means that the corporation's owners might face a lower overall tax bill if they leave some income in the corporation as retained earnings.

However, this illustration does not include the fact that if any portion of the Nevada corporation's income is distributed to the shareholders, then those dividends are taxed to the individual shareholders in addition to the tax paid by the corporation--the "double taxation" whammy! Nevertheless, if the shareholders are in a lower tax bracket, or if the corporation is not currently paying dividends, then clearly the corporate form would be advantageous in this example.

Before you make decisions pertaining to taxes, consult with a CPA for professional assistance.

State income tax

How much did your business pay to your state in income taxes last year? Whatever the amount, by arranging your business affairs so that your Nevada corporation actually earns a portion of your business income, you can easily reduce, or possibly eliminate, state income taxes on your business. Remember, Nevada has no corporate income tax and no individual income tax.

Other taxes

Your state probably has one or more of the following taxes which it imposes on corporations in your state. Use the checklist to compare your state's "other taxes" with those of Nevada.

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